**U.S.SECURITIES AND EXCHANGE COMMISSION**WASHINGTON,D.C.  20549

** **

# **FORM 10-Q**

 

| **(Mark  One)**                                                                                                                                                   |       |                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                              |       |                                                                                          |
| **ý**                                                                                                                                                        | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                              |       |                                                                                          |
| **For the quarterly period ended  March 28, 2008 or**                                                                                                             |
|                                                                                                                                                              |       |                                                                                          |
| **o**                                                                                                                                                             | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                              |       |                                                                                          |
| **For the transition period from             to            ** |
|                                                                                                                                                              |       |                                                                                          |
| **Commission file number: 000-30575**                                                                                                                             |

 

**AVOCENT CORPORATION**(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **91-2032368**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **4991  Corporate Drive   Huntsville, Alabama**                 | ** ** | **35805**                                |
| (Address of Principal  Executive Offices)                       |       | (Zip Code)                               |

 

**256-430-4000**(Registrant’s Telephone Number, Including Area Code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

 

xYes  oNo

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer x                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct): Yes  o    No  x

 

As of April 30, 2008, the number ofoutstanding shares of the Registrant’s Common Stock was 44,734,761.

 

 

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**AVOCENT CORPORATION**

**FORM 10-Q**

**March 28, 2008**

 

**INDEX**

 
| ** **                 | **Page(s)**           |
|----------------------------|-----------------------|
| ** **                 | ** **            |
| Part I                     | Financial Information |   |
|                       |                  |   |
|                       | Item 1.               | Financial Statements  (unaudited) |   |
|                       |                  |   |   |
|                       |                  | Consolidated  Statements of Income for the Three Months Ended March 28, 2008 and March 30,  2007 | 3 |
|                       |                  |   |   |
|                       |                  | Consolidated Balance  Sheets at March 28, 2008 and December 31, 2007 | 4 |
|                       |                  |   |   |
|                       |                  | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 28,  2008 and March 30, 2007 | 5 |
|                       |                  |   |   |
|                       |                  | Notes  to Condensed Consolidated Financial Statements | 6-13 |
|                       |                  |   |   |
|                       | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14-23 |
|                       |                  |   |   |
|                       | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risks | 23 |
|                       |                  |   |   |
|                       | Item 4.               | Controls and  Procedures | 23 |
|                       |                  |   |   |
| Part II Other  Information |                  |
|                       |                  |   |   |
|                       | Item 1.               | Legal Proceedings | 24 |
|                       |                  |   |   |
|                       | Item 1A.              | Risk Factors | 24 |
|                       |                  |   |   |
|                       | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds | 41 |
|                       |                  |   |   |
|                       | Item 6.               | Exhibits | 41 |
|                       |                  |   |   |
| Signature                  | 42                    |

 

2

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**PART I—FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

** **

**AVOCENTCORPORATIONCONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited, in thousands, exceptper share data)**

#### ** **

| ** **                                                                                                                                     | ** **   | **For the three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------|------------|
| ** **                                                                                                                                     | ** **   | **March 28,**                  | ** ** | **March 30,** | ** ** |
| ** **                                                                                                                                     | ** **   | **2008**                       | ** ** | **2007** | ** ** |
| Net sales:                                                                                                                                     | *** *** | ** **                     | ** ** | ** ** | *** *** |
| Products and  services                                                                                                                         |         | $                              | 117,582    |   | $ | 113,576 |   |
| Licenses and  royalties                                                                                                                        |         | 23,817                         |       | 19,575 |   |
| Total net sales                                                                                                                                |         | 141,399                        |       | 133,151 |   |
|                                                                                                                                           | *** *** | ** **                     | ** ** | ** ** | ** ** |
| Cost of sales:                                                                                                                                 | *** *** | ** **                     | ** ** | ** ** | ** ** |
| Products and  services                                                                                                                         |         | 46,797                         |       | 49,094 |   |
| Licenses and  royalties                                                                                                                        |         | 701                            |       | 359 |   |
| Amortization of  intangibles – licenses and royalties                                                                                     |         | 2,767                          |       | 2,683 |   |
| Total cost of  sales (includes $244 and $179 of stock-based compensation expense in 2008 and  2007, respectively)                              |         | 50,265                         |       | 52,136 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Gross profit                                                                                                                                   |         | 91,134                         |       | 81,015 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Research and  development expenses (includes $1,015 and $1,116 of stock-based compensation  expense in 2008 and 2007, respectively)            |         | 23,367                         |       | 20,881 |   |
| Selling, general  and administrative expenses (includes $2,679 and $2,366 of stock-based  compensation expense in 2008 and 2007, respectively) |         | 55,119                         |       | 48,660 |   |
| Retirement and  restructuring expenses (includes $615 of stock-based compensation expense in 2008)                                             |         | 2,971                          |       | — |   |
| Amortization of  intangible assets                                                                                                             |         | 7,535                          |       | 8,962 |   |
| Total operating  expenses                                                                                                                      |         | 88,992                         |       | 78,503 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Income from  operations                                                                                                                        |         | 2,142                          |       | 2,512 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Net investment  income                                                                                                                         |         | 897                            |       | 879 |   |
| Interest expense                                                                                                                               |         | (1,838                         | )          | (2,234 | ) |
| Other income  (expense), net                                                                                                                   |         | 455                            |       | (317 | ) |
|                                                                                                                                           |         |                           |       |   |   |
| Income before  provision for income taxes                                                                                                      |         | 1,656                          |       | 840 |   |
| Provision for  income taxes                                                                                                                    |         | 925                            |       | 94 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Net income                                                                                                                                     |         | $                              | 731        |   | $ | 746 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Earnings per  share:                                                                                                                           |         |                           |       |   |   |
| Basic                                                                                                                                          |         | $                              | 0.02       |   | $ | 0.01 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Diluted                                                                                                                                        |         | $                              | 0.02       |   | $ | 0.01 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Weighted average  shares used in computing earnings per share:                                                                                 |         |                           |       |   |   |
| Basic                                                                                                                                          |         | 46,233                         |       | 50,733 |   |
|                                                                                                                                           |         |                           |       |   |   |
| Diluted                                                                                                                                        |         | 46,617                         |       | 51,886 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AvocentCorporation**

**Consolidated Balance Sheets**

**(Unaudited,in thousands, except per share data)**

 
| ** **                                                                                                                                                                                                                  | ** ** | **March 28,   2008** | ** ** | **December 31,**

**2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                  | ** ** | ** **           | ** ** | ** **                 | ** ** |
| Current assets:                                                                                                                                                                                                             |       |                 |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                   |       | $                    | 98,494     |                       | $          | 105,183 |   |
| Investments maturing within one year                                                                                                                                                                                        |       | —               |       | 5,943                      |       |
| Accounts receivable, less allowance for doubtful  accounts of $2,398 and $2,481 at March 28, 2008 and December 31, 2007,  respectively                                                                                 |       | 107,078              |       | 109,851                    |       |
| Other receivables                                                                                                                                                                                                           |       | 10,727               |       | 10,799                     |       |
| Inventories                                                                                                                                                                                                                 |       | 30,373               |       | 30,103                     |       |
| Other current assets                                                                                                                                                                                                        |       | 5,195                |       | 4,399                      |       |
| Deferred tax assets, net                                                                                                                                                                                                    |       | 159                  |       | 5,928                      |       |
| Total current assets                                                                                                                                                                                                        |       | 252,026              |       | 272,206                    |       |
|                                                                                                                                                                                                                        |       |                 |       |                       |       |
| Property and equipment,  net                                                                                                                                                                                                |       | 36,950               |       | 37,298                     |       |
| Goodwill                                                                                                                                                                                                                    |       | 584,949              |       | 584,949                    |       |
| Other intangible  assets, net                                                                                                                                                                                               |       | 157,713              |       | 167,982                    |       |
| Deferred tax asset,  non-current                                                                                                                                                                                            |       | 19,040               |       | 13,297                     |       |
| Other assets                                                                                                                                                                                                                |       | 2,541                |       | 2,701                      |       |
| Total assets                                                                                                                                                                                                                |       | $                    | 1,053,219  |                       | $          | 1,078,433 |   |
|                                                                                                                                                                                                                        |       |                 |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                              | ** ** | ** **           | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                                                                                        |       |                 |       |                       |       |
| Accounts payable                                                                                                                                                                                                            |       | $                    | 15,061     |                       | $          | 20,031 |   |
| Accrued wages and commissions                                                                                                                                                                                               |       | 22,051               |       | 25,072                     |       |
| Accrued liabilities                                                                                                                                                                                                         |       | 29,777               |       | 30,630                     |       |
| Income taxes payable                                                                                                                                                                                                        |       | 8,366                |       | 14,950                     |       |
| Deferred revenue, current                                                                                                                                                                                                   |       | 59,116               |       | 54,738                     |       |
| Total current liabilities                                                                                                                                                                                                   |       | 134,371              |       | 145,421                    |       |
|                                                                                                                                                                                                                        |       |                 |       |                       |       |
| Unsecured bank line of  credit                                                                                                                                                                                              |       | 140,000              |       | 95,000                     |       |
| Deferred revenue,  non-current                                                                                                                                                                                              |       | 10,967               |       | 11,325                     |       |
| Other non-current  liabilities                                                                                                                                                                                              |       | 1,449                |       | 1,025                      |       |
| Total liabilities                                                                                                                                                                                                           |       | 286,787              |       | 252,771                    |       |
|                                                                                                                                                                                                                        |       |                 |       |                       |       |
| Commitments and contingencies*(see Note  12)*                                                                                                                                                                               |       |                 |       |                       |       |
|                                                                                                                                                                                                                        |       |                 |       |                       |       |
| Stockholders’ equity:                                                                                                                                                                                                  |       |                 |       |                       |       |
| Preferred stock, par value $0.001 per share; 5,000  shares authorized; no shares issued and outstanding                                                                                                                     |       | —               |       | —                     |       |
| Common stock, par value $0.001 per share; 200,000  shares authorized; March 31,  2008  —54,313 shares issued and  44,686 outstanding;  December 31, 2007 — 53,910 shares issued and 48,283 outstanding; |       | 54                   |       | 54                         |       |
| Additional paid-in capital                                                                                                                                                                                                  |       | 1,209,812            |       | 1,208,674                  |       |
| Accumulated other comprehensive income                                                                                                                                                                                      |       | 3,987                |       | 2,130                      |       |
| Accumulated deficit                                                                                                                                                                                                         |       | (217,988             | )          | (218,719                   | )          |
| Treasury stock, at cost; March 28, 2008, 9,539  shares; December 31, 2007, 5,627 shares;                                                                                                                                    |       | (229,433             | )          | (166,477                   | )          |
| Total stockholders’ equity                                                                                                                                                                                             |       | 766,432              |       | 825,662                    |       |
|                                                                                                                                                                                                                        |       |                 |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                             |       | $                    | 1,053,219  |                       | $          | 1,078,433 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

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**AVOCENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
| ** **                                                                         | ** **   | **For the three months ended** |       |
|------------------------------------------------------------------------------------|--------------|--------------------------------|------------|
| ** **                                                                         | ** **   | **March 28,**                  | ** ** | **March 30,** |   |
| ** **                                                                         | ** **   | **2008**                       |       | **2007** |   |
| *** ***                                                                       | *** *** | ** **                     |       | ** ** | * * |
| Cash flows from  operating activities:                                             | * *     | * *                       | * *   | * * | * * |
| Net income                                                                         |         | $                              | 731        |   | $ | 746 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                           |       |   |   |
| Depreciation                                                                       |         | 2,592                          |       | 2,354 |   |
| Amortization of  intangible assets                                                 |         | 10,454                         |       | 11,747 |   |
| Stock-based  compensation                                                          |         | 4,547                          |       | 3,661 |   |
| Amortization of  premiums (discounts) on investments                               |         | —                         |       | (73 | ) |
| Net loss on  disposition of fixed assets                                           |         | 14                             |       | 214 |   |
| Excess tax benefit from stock-based  compensation                                  |         | (3                             | )          | (820 | ) |
| Changes in  operating assets and liabilities, net of acquisition:                  |         |                           |       |   |   |
| Accounts  receivable, net                                                          |         | 3,457                          |       | 17,332 |   |
| Inventories                                                                        |         | (247                           | )          | 1,640 |   |
| Other assets                                                                       |         | (426                           | )          | (302 | ) |
| Accounts payable                                                                   |         | (6,153                         | )          | (956 | ) |
| Accrued wages  and commissions                                                     |         | (3,021                         | )          | (9,424 | ) |
| Accrued other  liabilities and deferred revenue                                    |         | (824                           | )          | (4,984 | ) |
| Income taxes,  current and deferred                                                |         | (6,420                         | )          | (3,291 | ) |
| Net cash  provided by operating activities                                         | ** **   | 4,701                          |       | 17,844 |   |
| ** **                                                                         | ** **   | ** **                     |       | ** ** |   |
| Cash flows from  investing activities:                                             |         |                           |       |   |   |
| Purchase of  other intangible assets                                               |         | (199                           | )          | (2,769 | ) |
| Purchases of  property and equipment                                               |         | (2,123                         | )          | (2,616 | ) |
| Purchases of  investments                                                          |         | —                         |       | (26,124 | ) |
| Maturities and  proceeds from sales of investments                                 |         | 5,942                          |       | 15,005 |   |
| Net cash (used  in) provided by investing activities                               |         | 3,620                          |       | (16,504 | ) |
| ** **                                                                         | ** **   | ** **                     |       | ** ** |   |
| Cash flows from  financing activities:                                             | ** **   | ** **                     |       | ** ** |   |
| Borrowings under  unsecured line of credit, net                                    |         | 45,000                         |       | — |   |
| Proceeds from  employee stock option exercises                                     |         | 129                            |       | 2,793 |   |
| Excess tax benefit from stock-based  compensation                                  |         | 3                              |       | 820 |   |
| Purchases of  treasury stock                                                       |         | (62,956                        | )          | (15,438 | ) |
| Net cash used in  financing activities                                             |         | (17,824                        | )          | (11,825 | ) |
|                                                                               |         |                           |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |         | 2,814                          |       | 24 |   |
|                                                                               |         |                           |       |   |   |
| Net decrease in  cash and cash equivalents                                         |         | (6,689                         | )          | (10,461 | ) |
| Cash and cash  equivalents at beginning of period                                  |         | 105,183                        |       | 81,301 |   |
| Cash and cash  equivalents at end of period                                        |         | $                              | 98,494     |   | $ | 70,840 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

Note 1.   Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in conformity with United States generally acceptedaccounting principles and reflect all adjustments consisting of normalrecurring adjustments which, in the opinion of management, are necessary for afair statement of the results for the periods shown.  The results of operations for these periodsare not necessarily indicative of the results expected for the full fiscal yearnor for any future period.  Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reportingperiod.  Actual results could differ fromthose estimates and assumptions.

 

The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and the related notes contained in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which is on file with the Securitiesand Exchange Commission and is available at our website, www.avocent.com. Theconsolidated balance sheet presented in the accompanying condensed consolidatedfinancial statements for December 31, 2007, was derived from the auditedfinancial statements filed in our 10-K for the period ended December 31,2007, but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America.

 

We report our annual results based on years ending December 31.  We report our quarterly results for the firstthree interim periods based on 13 week periods ending on Fridays and for thefourth interim period ending on December 31.

 

Our financial statements are consolidated and include the accounts ofAvocent Corporation and our wholly owned subsidiaries.  All significant inter-company transactionsand balances have been eliminated in consolidation.

 

Note 2.   Inventories

 

Inventoriesconsisted of the following at:

 
| ** **      | ** ** | **March 28, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Raw materials   |       | $                            | 1,086      |                            | $          | 1,394 |   |
| Work-in-process |       | 320                          |       | 1,058                           |       |
| Finished goods  |       | 28,967                       |       | 27,651                          |       |
| Inventories     |       | $                            | 30,373     |                            | $          | 30,103 |   |

 

Inventories above have been reduced by reserves forexcess and obsolete inventories of $7,482 and $7,328 as of March 28, 2008and December 31, 2007, respectively.

 

Note 3.   Equity and Treasury Stock

 

Stockoption exercises and restricted stock unit (RSU) vesting — Shares of our commonstock issued as a result of option exercises totaled 17,000 shares during thequarter ended March 28, 2008 and 136,000 shares during the quarter ended March 30,2007.  In the first quarter of 2008, a total of 545,000 restricted stock unitsvested.  On the issuance of these shares,159,000 shares were withheld for taxes, resulting in issuance of 386,000shares, net of tax withholding.  In the first quarter of 2007, a total of329,000 restricted stock units vested. On the issuance of these shares, 96,000 shares were withheld for taxes,resulting in issuance of 233,000 shares, net of tax withholding.

 

Stock repurchases— We repurchased 3,912,000 shares of our common stock during the quarter ended March 28,2008 at a cost totaling $62,956.  Werepurchased 487,000 shares of our common stock during the quarter ended March 30,2007 at a cost totaling $15,438. These treasury shares were purchased on theopen market through various brokers under the stock re-purchase plan previouslyapproved by our Board of Directors.  During the first quarter of 2008, our Board authorized the purchase ofan additional 4,000,000 shares under our program.  As of March 28, 2008, we are authorizedto repurchase an additional 2,400,000 shares under this program.

 

6

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

RSUsgranted — During the first quarter of 2008, our Compensation Committee approvedthe grant of 172,000 time-based and 184,000 market condition-based restrictedstock units to our officers and directors (*see note 13*).

 

Note 4.   Accumulated Other ComprehensiveIncome

 

Werecord unrealized gains and losses on our foreign currency translationadjustments, unrealized gains and losses on derivatives which are cash flowhedges, and unrealized holding gains or losses on our available-for-salesecurities, net of tax, as accumulated other comprehensive income, which isincluded as a separate component of stockholders’ equity.  Comprehensive income for the three monthsended March 28, 2008 and March 30, 2007 is as follows:

 
| ** **                                    | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **March 28, 2008**                       | ** ** | **March 30, 2007** | ** ** |
| Comprehensive  income                         |       |                                               |       |   |   |
| Net income                                    |       | $                                                  | 731        |   | $ | 746 |   |
| Unrealized gains  on investments              |       | —                                             |       | 37 |   |
| Unrealized gains  (losses) on cash flow hedge |       | (249                                               | )          | (38 | ) |
| Foreign currency  translation adjustment      |       | 2,107                                              |       | 80 |   |
| Total  comprehensive income                   |       | $                                                  | 2,589      |   | $ | 825 |   |

 

Asof March 28, 2008 and December 31, 2007, total accumulated othercomprehensive income was 3,987 and $2,130, respectively.

 

Note 5.   Earnings Per Share (share datain thousands)

 
| ** **                                                           | ** ** | **Income (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **            | ** ** |
| **For the  three months ended March 28, 2008**                  |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 731        |                      | 46,233     |                  | $          | 0.02 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested RSUs                                     |       | —                      |       | 384                       |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 731        |                      | 46,617     |                  | $          | 0.02 |   |
|                                                                 |       |                        |       |                      |       |                  |       |
| **For the  three months ended March 30, 2007**                  |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                       |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                         |       | $                           | 746        |                      | 50,733     |                  | $          | 0.01 |   |
| **Effect  of Dilutive Securities**                                   |       |                        |       |                      |       |                  |       |
| Stock options  and unvested RSUs                                     |       | —                      |       | 1,153                     |       | —                |       |
| **Diluted  EPS**                                                     |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 746        |                      | 51,886     |                  | $          | 0.01 |   |

 

Anti-dilutive options to purchase commonstock outstanding were excluded from the calculations above. Anti-dilutive options totaled 4,365 and 2,130 as of March 28, 2008 and March 30,2007, respectively.

 

Note 6.   SegmentReporting

 

In the firstquarter of 2008, we dissolved our Desktops Solutions Division (DSD).  DSD’s results were previously reported withinour Other Business Units.  The relatedrevenue and expenses of this business unit have not been material to ourconsolidated results, and this business unit was dissolved rather than beingmerged into another business unit.  

 

7

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

Accordingly, we willcontinue to report historical results for DSD within our Other BusinessUnits.  In addition, no goodwill wasallocated to this business unit and all related intangibles were fullyamortized prior to the dissolution of the business unit, so there was norelated write-off of goodwill or write-down of intangible assets as a result ofthe dissolution of this business unit. Costs associated with the dissolution ofDSD are included in retirement and restructuring expenses for the first quarterof 2008.  Retirement and restructuringexpenses includes costs relate to severance charges incurred due to thetermination of certain research and development activities and also include theretirement costs for our former CEO.

 

We evaluate theperformance of our segments based on revenue and operating profit, which iscalculated before corporate and unallocated costs, amortization of intangibles,acquired in-process research and development expense, and stock compensationcosts.  We do not track or use assets bysegment as a measure of performance, therefore, we have not presented assets bysegment.  The following is a presentationof information for our two reportable segments, Management Systems and LANDesk:

** **
| ** **                                                         | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                         | ** ** | **March 28, 2008**                       | ** ** | **March 30, 2007** | ** ** |
| Net revenue:                                                       | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management  Systems                                                |       | $                                                  | 107,731    |   | $ | 105,104 |   |
| LANDesk                                                            |       | 29,193                                             |       | 23,859 |   |
| Other business  units                                              |       | 3,699                                              |       | 4,219 |   |
| Corporate and  unallocated                                         |       | 776                                                |       | 750 |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       | (781 | ) |
| Total net  revenue                                                 |       | $                                                  | 141,399    |   | $ | 133,151 |   |
|                                                               |       |                                               |       |   |   |
| ** **                                                         | ** ** | **For the three months ended** | ** ** |
| ** **                                                         | ** ** | **March 28,   2008**                     | ** ** | **March 30,   2007** | ** ** |
| Operating income  (loss):                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management  Systems                                                |       | $                                                  | 26,432     |   | $ | 25,911 |   |
| LANDesk                                                            |       | 610                                                |       | (536 | ) |
| Other business  units                                              |       | (1,072                                             | )          | (3,151 | ) |
| Corporate and  unallocated costs                                   |       | (6,615                                             | )          | (3,613 | ) |
| Amortization of fair  value adjustment to LANDesk deferred revenue |       | —                                             |       | (781 | ) |
| Amortization of  intangibles                                       |       | (10,304                                            | )          | (11,657 | ) |
| Retirement and  restructuring expenses                             |       | (2,356                                             | )          | — |   |
| Stock-based  compensation expense                                  |       | (4,553                                             | )          | (3,661 | ) |
| Total income  from operations                                      |       | 2,142                                              |       | 2,512 |   |
|                                                               |       |                                               |       |   |   |
| Other expense                                                      |       | (486                                               | )          | (1,672 | ) |
| Income before  provision for income taxes                          |       | $                                                  | 1,656      |   | $ | 840 |   |

 

Sales by productline for Management Systems and LANDesk for the three months ended March 28,2008 and March 30, 2007 are as follows:

 
| ** **                            | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|
| ** **                            | ** ** | **March 28, 2008**                       | ** ** | **March 30, 2007** | ** ** |
| Management  Systems net revenue:      |       |                                               |       |   |   |
| KVM                                   |       | $                                                  | 78,926     |   | $ | 80,688 |   |
| Serial  management                    |       | 12,719                                             |       | 11,286 |   |
| Embedded  software and solutions      |       | 8,347                                              |       | 7,577 |   |
| Other                                 |       | 7,739                                              |       | 5,553 |   |
| Total Management  Systems net revenue |       | $                                                  | 107,731    |   | $ | 105,104 |   |

 

8

----

 

**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 
| ** **                 | ** ** | **For the Three  months ended  March 28, 2008** | ** ** | **For the Three  months ended  March 30, 2007** | ** ** |
|----------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| LANDesk net  revenue:      |       |                                                                     |       |                                                                     |       |
| Licenses and  royalties    |       | $                                                                        | 17,042     |                                                                     | $          | 13,376 |   |
| Maintenance and  services  |       | 12,151                                                                   |       | 10,483                                                                   |       |
| Total LANDesk  net revenue |       | $                                                                        | 29,193     |                                                                     | $          | 23,859 |   |

 

We sell ourproducts internationally to customers in several countries; however no foreigncountry accounted for more than 10% of sales in the first quarter of 2008 or2007.

 

Followingis a presentation of long-lived assets as of March 28, 2008 and December 31,2007:

 
| ** **          | ** ** | **March 28,  2008** | ** ** | **December 31,   2007** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------------------|------------|
| Long-lived  assets: |       |                     |       |                              |       |
| United States       |       | $                        | 25,825     |                              | $          | 26,266 |   |
| International       |       | 11,125                   |       | 11,032                            |       |
| Total               |       | $                        | 36,950     |                              | $          | 37,298 |   |

 

**Note 7.**   Forward Contracts and InterestRate Swap

** **

We use forward contracts toreduce our foreign currency exposure related to the net cash flows from ourinternational operations.  The majorityof these contracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in trade payables, with theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of income.  As ofMarch 28, 2008, we had three open forward contracts with an approximatefair value of $20.  As of December 31,2007, we had three open forward contracts with an approximate fair value of $8.

 

In2006, we entered into an interest rate swap agreement with a notional amount of$125,000.  The notional amount of theinterest rate swap was $60,000 as of March 28, 2008.  The objective of the rate swap agreement isto provide a hedge against rising LIBOR interest rates that would have anegative effect on our cash flows due to changes in interest rates on the lineof credit.  The swap was effective on August 31, 2006 and terminateson December 31, 2008.  The swap calls for us to make fixed ratepayments of 5.42% over the term of the hedge and to receive floating ratepayments based on LIBOR (matching the LIBOR rate in the line of credit above)from the counter-party. We anticipate that the hedge will be settled uponmaturity and it is being accounted for as a cash flow hedge. The interest rateswap is recorded at fair value each reporting period with the changes in thefair value of the hedge that take place through the date of maturity recordedin accumulated other comprehensive income (OCI).

 

At March 28,2008, we recorded an unrealized loss on the swap, net of tax, of $640 inaccumulated OCI. There was no ineffectiveness in the quarter, and we anticipateno significant ineffectiveness throughout the remainder of 2008.

 

9

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

**Note 8.**   Goodwill and Other IntangibleAssets

** **

**Otherintangible assets subject to amortization were as follows:**

** **
| ** **                                | ** ** | **March 28, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology                     |       | $                            | 56,840     |                            | $          | 20,206 |   | $ | 56,840 |   | $ | 17,292 |   |
| Internally  developed software for resale |       | 21,900                       |       | 5,779                           |       | 21,900 |   | 4,867 |   |
| Patents and  trademarks                   |       | 30,795                       |       | 7,655                           |       | 30,670 |   | 6,590 |   |
| Customer base  and certifications         |       | 99,938                       |       | 29,514                          |       | 99,878 |   | 25,496 |   |
| Maintenance  contracts                    |       | 9,600                        |       | 3,040                           |       | 9,600 |   | 2,560 |   |
| Non-compete  agreements                   |       | 10,624                       |       | 6,304                           |       | 10,624 |   | 5,432 |   |
| Other                                     |       | 2,310                        |       | 1,796                           |       | 2,310 |   | 1,603 |   |
|                                      |       | $                            | 232,007    |                            | $          | 74,294 |   | $ | 231,822 |   | $ | 63,840 |   |

** **

**For the threemonths ended March 28, 2008 and March 30, 2007, amortization expensefor other intangible assets was $10,454 and $11,747, respectively.  The approximate estimated annual amortizationfor other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008, remainder                              |       | $          | 32,103     |   |
| 2009                                         |       | $          | 37,757     |   |
| 2010                                         |       | $          | 34,724     |   |
| 2011                                         |       | $          | 26,272     |   |
| 2012                                         |       | $          | 17,112     |   |
| Thereafter                                   |       | $          | 9,745      |   |

** **

**There were nochanges in the carrying amount of goodwill among the business units for thethree months ended March 28, 2008.**

** **

**Note 9.  ProductWarranties and Deferred Revenue**

** **

The activity within theliability for warranty returns for the three months ended March 28, 2008is as follows:

 
| Balance,  January 1, 2008                            |   | $      | 1,854  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accruals for  product warranties issued during the period |   | 2,029  |   |
| Settlements made  during the period                       |   | (2,087 | )      |
| Balance,  March 28, 2008                             |   | $      | 1,797  |   |

 

Deferred revenuerelated to our extended warranty for hardware products program was $5,726 at March 28,2008 and $5,388 at December 31, 2007. We recorded earned revenue from the amortization of deferred revenuerelated to extended warranties of $915 during the three months ended March 28,2008.  In addition, we recorded newextended warranties of $1,253 during the three months ended March 28,2008.

 

We defer revenuefor subscription, service and maintenance contracts until earned, which isgenerally over the term of the contract or when services are performed. As of March 28,2008, deferred revenue was $64,338, of which approximately $62,641 related toLANDesk.  As of December 31, 2007,deferred revenue was $60,647, of which approximately $59,078 related toLANDesk.

 

10

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

Note 10. Income Taxes

 

The effective taxrate in the first quarter of 2008 was 55.9% compared to an effective tax rateof 11.2% in the first quarter of 2007. The provision for income taxes was $925 for the first quarter of 2008,compared to $94 in the first quarter of 2007. The increase in the effective tax rate was primarily the result of theexpiration of the U.S. Research and Development Tax Credit, which as of March 28,2008 has not been reinstated, expenses related to stock options, and a netincrease in our reserves for uncertain tax positions.

 

As of March 28,2008, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,297, of which $3,535, if recognized, wouldaffect the effective tax rate.  Werecognize potential accrued interest and penalties related to unrecognized taxbenefits from our global operations within income tax expense. We recorded $241of such expenses in the first quarter of 2008. As of March 28, 2008, we had accrued interest payable related tothe unrecognized tax benefits of $2,201.

 

We conductbusiness globally, and as a result our subsidiaries file income tax returns inthe U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business we aresubject to examinations by taxing authorities throughout the world includingthe U.S.  With few exceptions, we are nolonger subject to U.S. federal, state, and local, or non-U.S. income taxexaminations before 2004.

 

The InternalRevenue Service (IRS) commenced an examination in 2006 of our U.S. income taxreturns for 2004 and 2005.  During thefirst quarter of 2008, the IRS proposed certain adjustments relating primarilyto transfer pricing, increasing our tax liabilities for those periods.  We have reached a negotiated settlement withthe IRS concerning those adjustments resulting in an additional tax payment of$6,600, which we had previously accrued and was paid during the first quarterof 2008.   We anticipate that a paymentfor interest will be made not to exceed $1,500 (which we have accrued) by theend of the second quarter of 2008.  We donot anticipate that this payment would result in a material change to ourfinancial position.

 

Note 11. Fair ValueMeasurements

 

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements,*” (SFAS 157),which is effective for fiscal years beginning after November 15, 2007 andfor interim periods within those years. This statement defines fair value,establishes a framework for measuring fair value, and expands the relateddisclosure requirements. This statement applies under other accountingpronouncements that require or permit fair value measurements. The statementindicates, among other things, that a fair value measurement assumes that thetransaction to sell an asset or transfer a liability occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market for the asset or liability. SFAS 157 defines fairvalue based upon an exit price model.

 

Relative to SFAS 157, the FASB issued FASB StaffPositions (FSP) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13,“*Accounting for Leases*,” (SFAS 13) andits related interpretive accounting pronouncements that address leasingtransactions, while FSP 157-2 delays the effective date of the application ofSFAS 157 to fiscal years beginning after November 15, 2008 for allnonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis.

 

We adopted SFAS 157 as of January 1, 2008,with the exception of the application of the statement to nonfinancial assetsand nonfinancial liabilities. Nonfinancial assets and nonfinancial liabilitiesfor which we have not applied the provisions of SFAS 157 include those measuredat fair value in goodwill impairment testing, indefinite lived intangibleassets measured at fair value for impairment testing, asset retirementobligations initially measured at fair value, and those initially measured atfair value in a business combination.

 

SFAS 157 establishes a valuation hierarchy fordisclosure of the inputs to valuation used to measure fair value. Thishierarchy prioritizes the inputs into three broad levels as follows. Level 1inputs are quoted prices (unadjusted) in active markets for identical assets orliabilities. Level 2 inputs are quoted prices for similar assets andliabilities in active markets or inputs that are observable for the asset orliability, either directly or indirectly through market corroboration, forsubstantially the full term of the financial instrument. Level 3 inputs areunobservable inputs based on our own assumptions used to measure assets andliabilities at fair value. A financial asset or liability’s classificationwithin the hierarchy is determined based on the lowest level input that issignificant to the fair value measurement.

 

11

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

The following table provides the assets andliabilities carried at fair value measured on a recurring basis as of March 28,2008:

 
| ** **              | ** ** | ** **                                               | ** ** | **Fair Value Measurements at March 28, 2008** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Total  Carrying  Value at  March 28,  2008** | ** ** | **Quoted  prices in  active  markets  (Level 1)**                 | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
|                    |       |                                                     |       |                                                                        |       |   |   |   |   |
| Derivative  liabilities |       | $                                                        | 1,016      |                                                                        | $          | — |   | $ | 1,016 |   | $ | — |   |
|                         |            |                                                          |            |                                                                             |            |  |  |  |  |  |  |  |  |

 

The fair market value of “over-the-counter”derivatives is measured at fair value using expected cash flows over the lifeof the trade.  The fair value measurementis prepared  using the closing mid-marketrate/price environment on March 28, 2008, using proprietary models,available market data and reasonable assumptions.  These fair value measurements are classifiedwithin Level 2 of the valuation hierarchy.

 

Note 12.  Legal Matters

 

In March 2006,TFS Electronic Manufacturing Services, Inc. (TFS) filed a Third-PartyComplaint and an Objection to Claim of Avocent Corporation with the UnitedStates Bankruptcy Court, District of Arizona. As a result of the complaint, an adversary proceeding wascommenced against us in the TFS bankruptcy case in an effort to disallow ourbankruptcy claim against TFS in its entirety. TFS also seeks damages in an undetermined amount for our alleged breachof contract, negligence, negligent misrepresentations, breaches of warranty,unjust enrichment, disparagement of TFS’ business, and quantum merit.  TFS is seeking recovery of actual damages,punitive damages, attorneys’ fees, pre- and post-judgment interest, costs fromus.  In late April 2008, weentered into a Settlement Agreement with TFS and are awaiting Bankruptcy Courtapproval of the Settlement Agreement. The settlement was not material to our financial statements but wasincluded within the results for the quarter ended March 28, 2008.

 

In January 2007, we filed a complaint forpatent infringement in the United States District Court for the WesternDistrict of Washington against Aten Technology, Inc., Aten InternationalCo., Ltd, Belkin Corporation, Rose Electronics and its general partners, andTrippe Manufacturing Company.  Thedefendants filed counterclaims alleging non-infringement, unenforceability, andinvalidity.  In May 2007, we enteredinto a Settlement and License Agreement with Trippe Manufacturing, anddismissed Trippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office.  Thatre-examination is currently underway.

 

In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against Avocent in the Circuit Court of MadisonCounty, Alabama, seeking $9,500 for costs allegedly incurred by KBMin its manufacturing efforts on behalf of Avocent.  We have filed an answer and counterclaimsagainst KBM and one of its principals. Discovery is currently underway.

 

In April 2007,we filed a complaint for declaratory judgment against Aten International Co.,Ltd. in the United States District Court for the Northern District ofAlabama.  We are seeking a declaratoryjudgment that two patents owned by Aten and asserted against Avocent areinvalid and that certain of products alleged by Aten to infringe do notinfringe these patents.  In August 2007,Aten’s motion to dismiss for lack of personal jurisdiction was granted, and wehave appealed that ruling to the Federal Circuit Court of Appeals.  Oral arguments were held in February 2008.

 

In November 2007,Gemini IP, LLC filed a complaint for patent infringement in the United StatesDistrict Court for the Eastern District of Texas, Sherman Division, againstAvocent Corporation and our subsidiary LANDesk Software, Inc.  The complaint alleges infringement of aGemini patent through the sales of a LANDesk product.  The complaint seeks injunctive relief,damages, attorneys’ fees, and costs. Avocent Corporation was dismissed from the lawsuit in January 2008,and we have made a claim for indemnification against the LANDesk escrow account.  In April 2008, the District Court stayedthe action pending a review of the Gemini Patent by the Patent and Trademark Office.

 

We acquired LANDesk Group Limited, a privately-heldcompany, in August 2006, and the acquisition agreements provided for totalinitial consideration of approximately $407 million and a potential earn-outpayment to the former shareholders of LANDesk of up to $60 million if LANDeskachieved specified revenue targets for the full year of 2006.  Based on LANDesk’s 2006 revenue results, weconcluded that LANDesk did not achieve the minimum revenue target required tocause any earn-out payment and that no earn-out was earned or payable.  Accordingly, we did not pay, and have notaccrued for, any earn-out payment.  TheShareholder Representative for the former shareholders of LANDesk institutedthe arbitration procedure described in the acquisition agreements and ischallenging our conclusion that no earn-out was earned or payable.

 

We intend to vigorously defend each of thesematters, but the outcome of any claim, litigation, or proceeding is alwaysinherently uncertain.  Based on the factsand circumstances currently known to us, we believe that resolution of theforegoing matters will not materially affect our operations, financial condition,or cash flows.

 

12

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

**Note 13. Recently Issued Accounting Pronouncements**

** **

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements”* (SFAS 157). SeeNote 11 for additional discussion.

 

In February 2007, the FASB issued SFAS No. 159,“*The Fair Value Option for Financial Assetsand Financial Liabilities — Including an amendment of FASB Statement No. 115”*(SFAS 159).  SFAS No. 159permits an entity to elect fair value as the initial and subsequent measurementattribute for many financial assets and liabilities.  Entities electing the fair value option wouldbe required to recognize changes in fair value in earnings.  Entities electing the fair value option arerequired to distinguish, on the face of the statement of financial position,the fair value of assets and liabilities for which the fair value option has beenelected and similar assets and liabilities measured using another measurementattribute.  SFAS 159 is effectivefor fiscal years beginning after November 15, 2007.  The adjustment to reflect the differencebetween the fair value and the carrying amount would be accounted for as acumulative-effect adjustment to retained earnings as of the date of initialadoption.  We have adopted SFAS 159 andhave elected not to measure any additional financial instruments or other itemsat fair value.

 

In December 2007, the FASB issued SFAS No. 141(R),“*Business Combinations”*(SFAS 141(R)), which replaces SFAS 141.  SFAS 141(R) revises the principlesand requirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  FAS 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after an entity’s fiscal year that begins after December 15,2008.  The application of SFAS 141(R) willresult in a significant change in accounting for future acquisitions after theeffective date.

 

In March 2008,the FASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS No. 161).SFAS No. 161 requires companies with derivative instruments to discloseinformation that would enable financial statement users to understand how andwhy a company uses derivative instruments, how derivative instruments andrelated hedged items are accounted for under SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities*,”(SFAS No. 133) and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows.The new requirements apply to derivative instruments and non-derivativeinstruments that are designated and qualify as hedging instruments and relatedhedged items accounted for under SFAS 133. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008; however, early application is encouraged.

 

**Note 14. Subsequent Events**

** **

During the period from March 26, 2008 through March 28,2008, we purchased 88,000 additional shares of our common stock under our sharerepurchase program for a total cost of $1,493. However, as these transactions settled after March 28, 2008, wewill record these trades as occurring in the second quarter of 2008.

 

During the secondquarter of 2008 our Compensation Committee approved the grant of 525,000time-based and 196,000 market conditioned-based restricted stock units to ouremployees (*see Note 3*).

 

13

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** **

**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

** **

*THE INFORMATION IN THIS ITEM 2**“MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”**AND IN OTHER PARTS OF THIS FORM10-Q CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL;STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORYLEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THEFLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND ITRELATED SPENDING TRENDS; STATEMENTS REGARDING OUR PRODUCT PLATFORMS ANDOUR  ABILITY TO RESUME GROWTH IN OUROVERALL BUSINESS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTSAND EMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES ANDCOMPETITIVE FACTORS; STATEMENTS REGARDING OUR ANTICIPATED FUTURE GROSS MARGINS,RESEARCH AND DEVELOPMENT EXPENSES, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES;AND STATEMENTS REGARDING THE OUTCOME OF, AND OUR LEGAL COSTS FOR, PATENT ANDOTHER LEGAL CLAIMS LITIGATION AND PROCEEDINGS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCEINCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART II, ITEM 1A “RISKFACTORS.”*

 

**Overview**

 

AvocentCorporation designs, manufactures, licenses, and sells software and hardwareproducts and technologies that provide connectivity and centralized managementof information technology (IT) infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivityand systems management, endpoint security, and service management products andtechnologies that centralize control of servers, desktop computers, serialdevices, wireless devices, mobile devices, and network appliances, thusincreasing the efficiency of IT resources. Server manufacturers resell private-labeled Avocent KVM (keyboard,video, and mouse) switches and embedded software and hardware technology intheir systems, and companies large and small depend on our software andhardware products and technologies for managing their growing IT infrastructure.

 

For a more completedescription of our products, technologies and markets, please refer to our Form 10-K,which was filed on February 21, 2008.

 

Most of our revenue isderived from sales to a limited number of OEMs (who purchase our switchingsystems on a private-label or branded basis for integration and sale with theirown products), sales through our reseller and distributor network, and sales toa limited number of direct customers. Sales to our branded customers accountedfor 66% of sales in the first quarter of 2008 and 64% of sales in the firstquarter of 2007.  Sales to our OEMcustomers accounted for 34% of sales in the first quarter of 2008 and 36% ofsales in the first quarter of 2007.  Wedo not have contracts with many of our branded customers, and in general, ourOEM and branded business customers are obligated to purchase products from usonly pursuant to binding purchase orders. The loss of, or material decline in orders from, these customers wouldhave a material adverse effect on our business, financial condition, results ofoperations, and cash flows.  Our top fivecustomers include both OEM and branded customers, and accounted for 46% and 44%of sales in the first quarter of 2008 and 2007, respectively.

 

We sell products toresellers, distributors, end-users, and OEMs in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 52% and 55% of first quarter sales in 2008 and 2007,respectively.  No foreign countryaccounted for more than 10% of sales in the first quarter of 2008 or 2007.

 

With continuedindustry-wide initiatives to reduce all channel inventories and to shorten leadtimes, trends with our major customers are, generally, to reduce the number ofweeks of forward-committed firm orders. This trend continues to affect our business with certain distributors,OEMs, and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage.

 

We experience significantprice competition in the market for all of our products, and we expect thatpricing pressures will continue in the future. In addition, general economic conditions are not predictable, and we expectour revenue growth rate to fluctuate in relation to economic conditions and ITrelated spending trends.

 

**Many of our executive officers and directors are vested insignificant amounts of options to purchase shares of our common stock andRSUs.  These officers and directors haveinformed us that they have sold, and may sell additional, shares of our commonstock to provide liquidity and diversify their portfolios.  During the first and second quarters of 2008,our Board of Directors granted both time-based and market condition-basedrestricted stock units (RSUs) with two and three year vesting. Awards withsimilar terms were also granted in the second quarter of 2007.**

** **

**In the first quarter of 2008, we discontinued our DesktopSolutions business unit and transferred some of its personnel and a portion ofits technology into Management Systems.**  We believeour remaining business units allow us to focus on new technology and 

** **

**14**

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** **

**growthopportunities and to add product and shareholder value in the future.  We believe this structure enhances customerservice, speeds delivery of products to market and better focuses our research,development, and marketing resources.**

** **

**Our largest business unit, Management Systems, comprised76% of our consolidated net revenue in the first quarter of 2008 and 79% in2007.  LANDesk contributed 21% of netrevenue to the first quarter of 2008 and 17% in 2007.  Our other business units and unallocatedrevenue comprised the remaining percentage of our consolidated net revenue in2008 and 2007.  See Note 6 in the notesto the condensed c**onsolidated financial statementscontained in Part I, Item 1 of this document.

** **

**Resultsof Operations**

 

The following table sets forth,for the periods indicated, selected statement of income data expressed as apercentage of net sales:

 
| ** **                                    | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **March 28,  2008**                           | ** ** | **March 30,  2007** | ** ** |
| Net sales                                     |       | 100.0                                              | %          | 100.0 | % |
| Cost of sales                                 |       | 35.5                                               |       | 39.2 |   |
| Gross profit                                  |       | 64.8                                               |       | 60.8 |   |
| Operating  expenses:                          |       |                                               |       |   |   |
| Research and  development expenses            |       | 16.5                                               |       | 15.7 |   |
| Selling, general  and administrative expenses |       | 39.0                                               |       | 36.5 |   |
| Retirement and  restructuring expenses        |       | 2.1                                                |       | — |   |
| Amortization of  intangible assets            |       | 5.3                                                |       | 6.7 |   |
| Total operating  expenses                     |       | 62.9                                               |       | 58.9 |   |
|                                          |       |                                               |       |   |   |
| Income from  operations                       |       | 1.6                                                |       | 1.9 |   |
| Net investment  income                        |       | 0.6                                                |       | 0.7 |   |
| Interest expense                              |       | (1.3                                               | )          | (1.7 | ) |
| Other income  (expense), net                  |       | 0.3                                                |       | (0.2 | ) |
| Income before  provision for income taxes     |       | 1.2                                                |       | 0.7 |   |
| Provision for  income taxes                   |       | 0.7                                                |       | 0.1 |   |
| Net income                                    |       | 0.5                                                | %          | 0.6 | % |

 

*Net sales.*  Our net sales consist of sales of keyboard,video, and mouse (KVM) console switching systems, digital connectivity productsand technologies, software licenses and subscriptions, support and maintenanceagreements, serial connectivity devices, wireless extension products, IPMI,extension, remote access and management products and technologies, androyalties from licensing our intellectual property.

 
| ** **                         | ** ** | **For the three months ended** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **March 28,  2008**                           | ** ** | **% of  Sales** | ** ** | **March 30,  2007** | ** ** | **% of  Sales** | ** ** |
| Net sales,  customer distribution: |       |                                               |       |   |   |   |   |   |   |
| Branded                            |       | $                                                  | 93,663     |   | 66 | % | $ | 85,044 |   | 64 | % |
| OEM                                |       | 47,736                                             |       | 34 | % | 48,107 |   | 36 | % |
|                               |       |                                               |       |   |   |   |   |   |   |
|                               |       | $                                                  | 141,399    |   | 100 | % | $ | 133,151 |   | 100 | % |

 

The 6.2% growth in sales was primarily the result ofincreased branded sales across our geographic regions, which served to offset aslight decline in our OEM sales.  Brandedsales in EMEA and Asia both grew approximately 19% in the first quarter of 2008from the first quarter of 2007.  Althoughour OEM sales were down slightly by approximately 1% from the first quarter of2007, OEM sales did grow 10% in EMEA and 8% in Asia in the first quarter of2008.  We attribute the strength in ourforeign markets partly to the decline in value of the dollar as compared to theother currencies, increasing the purchasing power of these currencies, as manyof our international sales transactions are in dollars.

 

15

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| ** **                                                         | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                         | ** ** | **March 28,  2008**                           | ** ** | **% of  Sales** | ** ** | **March 30,  2007** | ** ** | **% of  Sales** | ** ** |
| Business unit  net sales:                                          |       |                                               |       |   |   |   |   |   |   |
| Management  Systems                                                |       | $                                                  | 107,731    |   | 76 | % | $ | 105,104 |   | 79 | % |
| LANDesk                                                            |       | 29,193                                             |       | 21 | % | 23,859 |   | 18 | % |
| Other business  units                                              |       | 3,699                                              |       | 3 | % | 4,219 |   | 3 | % |
| Corporate and  unallocated                                         |       | 776                                                |       | — |   | 750 |   | — |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       | — |   | (781 | ) | — |   |
|                                                               |       |                                               |       |   |   |   |   |   |   |
|                                                               |       | $                                                  | 141,399    |   | 100 | % | $ | 133,151 |   | 100 | % |
|                                                                    |            |                                                    |            |  |  |  |  |  |  |  |  |  |

 

Our Management Systems businessunit is comprised of our traditional KVM products, our serial products and ourembedded software and solutions products. Management Systems sales increased approximately 3% in the first quarter2008 compared to the first quarter of 2007, led by slight improvements in ourserial and embedded software products, especially in our overseas markets.  Our KVM products sales were down slightly inthe first quarter 2008 from the first quarter of 2007 primarily as a result ofthe slower OEM sales experienced in the U.S. Sales were also affected by price reductions on certain older analogproducts.  Sales by product linefor Management Systems for the three months ended March 28, 2008 and March 30,2007 are as follows:

 
| ** **                            | ** ** | **For the three months  ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **March 28,  2008**                                 | ** ** | **March 30,  2007** | ** ** |
| Management  Systems, net revenue:     |       |                                                     |       |   |   |
| KVM                                   |       | $                                                        | 78,926     |   | $ | 80,688 |   |
| Serial  management                    |       | 12,719                                                   |       | 11,286 |   |
| Embedded  software and solutions      |       | 8,347                                                    |       | 7,577 |   |
| Other                                 |       | 7,739                                                    |       | 5,553 |   |
| Total Management  Systems net revenue |       | $                                                        | 107,731    |   | $ | 105,104 |   |

 

LANDeskrevenue and bookings are comprised of license-based revenue, primarily from theLANDesk Management Suite product, and subscription-based revenue,primarily from the LANDesk Security Suite and LANDesk Patch Managerproducts and from maintenance and support agreements related to LANDeskManagement Suite.  Compared to the firstquarter of 2007, LANDesk revenues increased 22 % and bookings increased 32%during the first quarter of 2008.  LANDesk’s growth in bookings in the first quarter 2008 was attributableto new license sales of the LANDesk Management Suite and new subscriptionsof the LANDesk Security Suite.  LDMSproducts grew to $16.7 million in the first quarter of 2008 from $13.3 millionin the first quarter of 2007, while security products grew to $6.3 million inthe first quarter of 2008 from $5.6 million in the first quarter of 2007.  The growth in subscription and maintenancerevenue also results in an increase to deferred revenue recorded on the balancesheet.  Deferred revenue increased to $70.1million at March 28, 2008 from $66.1 million at December 31,2007.  Sales by product line forLANDesk for the three months ended March 28, 2008 and March 30, 2007are as follows:

 
| ** **                 | ** ** | **For the three months ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 28,  2008**                           | ** ** | **March 30,  2007** | ** ** |
| LANDesk net  revenue:      |       |                                               |       |   |   |
| Licenses and  royalties    |       | $                                                  | 17,042     |   | $ | 13,376 |   |
| Maintenance and  services  |       | 12,151                                             |       | 10,483 |   |
| Total LANDesk  net revenue |       | $                                                  | 29,193     |   | $ | 23,859 |   |

 

International sales grew13% in 2008 from 2007, while sales within the United States grew less than 1%in 2008 from 2007.  As mentionedpreviously, our OEM and branded businesses were both strong in EMEA and Asia,but only our branded business was up in North America.  The growth experienced in our North Americabranded business was enough to partially offset the declines in our NorthAmerica OEM business.

 

16

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| ** **                             | ** ** | **For the three months ended** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **March 28,  2007**                           | ** ** | **% of  Sales** | ** ** | **March 30,  2007** | ** ** | **% of  Sales** | ** ** |
| Net sales,  geographical distribution: |       |                                               |       |   |   |   |   |   |   |
| United States                          |       | $                                                  | 74,218     |   | 52 | % | $ | 73,797 |   | 55 | % |
| International                          |       | 67,181                                             |       | 48 | % | 59,354 |   | 45 | % |
|                                   |       |                                               |       |   |   |   |   |   |   |
|                                   |       | $                                                  | 141,399    |   | 100 | % | $ | 133,151 |   | 100 | % |

 

*Grossprofit.* Gross profit is affected by a variety of factors,including the ratio of sales among our distribution channels, as OEM salestypically have lower gross margins than our branded sales; absorption of fixedcosts as sales levels fluctuate; product mix and component costs; labor costs;new product introductions by us and by our competitors; increasing sales of oursoftware products which tend to have higher gross margins; and our outsourcingof manufacturing and assembly services.

 
| ** **                                                         | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                         | ** ** | **March 28, 2008**                       | ** ** | **Gross  Margin  %** | ** ** | **March 30, 2007** | ** ** | **Gross  Margin  %** | ** ** |
| Management  Systems                                                |       | $                                                  | 66,514     |   | 61.7 | % | $ | 61,670 |   | 58.7 | % |
| LANDesk                                                            |       | 25,339                                             |       | 86.8 | % | 20,965 |   | 87.9 | % |
| Other business  units                                              |       | 1,548                                              |       | 41.8 | % | 1,292 |   | 33.9 | % |
| Corporate and  unallocated                                         |       | 744                                                |       |   |   | 731 |   |   |   |
| Stock-based  compensation                                          |       | (244                                               | )          |   |   | (179 | ) |   |   |
| Intangible  amortization – LANDesk software                   |       | (2,767                                             | )          |   |   | (2,683 | ) |   |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                             |       |   |   | (781 | ) |   |   |
| Gross profit  dollars and margin %                                 |       | $                                                  | 91,134     |   | 64.5 | % | $ | 81,015 |   | 60.8 | % |

 

The improvement in gross margin resulted primarily from the increasedsales across all business units, particularly at LANDesk and Management Systems.  LANDesk sales grew 22% in the first quarterof 2008 compared to the first quarter of 2007. The gross margins for LANDesk software products are significantly higherthan the remainder of our business. Therefore, the increase in LANDesk’s sales directly increased ourconsolidated gross margin for the first quarter of 2008 compared to the firstquarter of 2007.  Management Systemsrevenue increased 3% in the first quarter of 2008 compared to the first quarterof 2007.  In addition to increased sales,Management Systems experienced a change in product mix and reduced excess andobsolete inventory provisions in the first quarter of 2008 compared to thefirst quarter of 2007.

 

*Operatingexpenses.*

 
| ** **                                    | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **March 28,   2008**                     | ** ** | **% of   Sales** | ** ** | **March 30,   2007** | ** ** | **% of   Sales** | ** ** |
|                                          |       |                                               |       |   |   |   |   |   |   |
| Research and  development expense             |       | $                                                  | 23,367     |   | 16.5 | % | $ | 20,881 |   | 15.7 | % |
| Selling,  general, and administrative expense |       | 55,119                                             |       | 39.0 | % | 48,660 |   | 36.5 | % |
| Retirement and  restructuring expenses        |       | 2,971                                              |       | 2.1 | % | — |   | — |   |
| Amortization of  intangible assets            |       | 7,535                                              |       | 5.3 | % | 8,962 |   | 6.7 | % |
|                                          |       |                                               |       |   |   |   |   |   |   |
| Total operating  expenses                     |       | $                                                  | 88,992     |   | 62.9 | % | $ | 78,503 |   | 58.9 | % |

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services, andmaterials costs, all of which are expensed as incurred.  R&D increased 12% in the first quarter of2008 from the first quarter of 2007. The increase in R&D expense isprimarily attributable to the impact of our continued investment in targetedintegrated R&D projects, including Avocent Management Platform, real-timevisualization and power management, which leverage technology from bothManagement Systems and LANDesk.  Webelieve that the timely development of innovative products and enhancements toexisting products is essential to maintaining our competitive position, and wewill continue to 

 

17

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make significantinvestments in research and development.

 

***Selling, general andadministrative expenses.***  Selling, general and administrative expensesinclude personnel, materials, services and other related costs foradministration, finance, information systems, human resources, sales andmarketing and general management, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses,and related travel costs.  Selling,general and administrative expenses increased 13% in the first quarter of 2008from the first quarter of 2007. The increase in selling, general andadministrative expenses was attributed primarily to increased sales commissionsas a direct result of increased sales for the period.  We also experienced higher legal expensesduring the first quarter of 2008 as compared to the first quarter of 2007 inassociation with various patent and legal cases.

** **

*Retirement and restructuring expenses**. ***Retirement and restructuring expenses for the first quarter of 2008 relate to severance charges incurred due to the termination of certain research and development activities and include the retirement costs for our former CEO.

 

***Amortization of intangible assets***. Amortization of $7.5 million in the first quarter of 2008 included theamortization of intangible assets created as a result of the acquisitions ofSonic Mobility, Cyclades, and LANDesk. Amortization of $9.0 million in the first quarter of 2007 included theamortization of the identifiable intangible assets created as a result of theacquisitions of OSA, Sonic Mobility, Cyclades, and LANDesk.  The decrease in amortization expense relatesprimarily to fully amortizing certain intangible assets in 2007 recorded inrelation to the OSA acquisition in 2004.

** **

*Stock-based Compensation. *We allocatestock-based compensation expense based on the department in which an employeeworks.  Stock compensation expenses forthe first quarter 2008 and 2007 were as follows:

 
| ** **                                   | ** ** | **For the three months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                   | ** ** | **March 28,  2008**                           | ** ** | **% of  Sales** | ** ** | **March 30,  2007** | ** ** | **% of  Sales** | ** ** |
| Stock-based  compensation:                   |       |                                               |       |   |   |   |   |   |   |
| Cost of sales                                |       | $                                                  | 244        |   |   |   | $ | 179 |   |   |   |
| Research and  development expense            |       | 1,015                                              |       |   |   | 1,116 |   |   |   |
| Selling, general  and administrative expense |       | 2,679                                              |       |   |   | 2,366 |   |   |   |
| Retirement and  restructuring expense        |       | 615                                                |       |   |   | — |   |   |   |
|                                         |       |                                               |       |   |   |   |   |   |   |
|                                         |       | $                                                  | 4,553      |   | 3.3 | %   | $ | 3,661 |   | 2.8 | % |

 

Stock-based compensation increased 24% inthe first quarter 2008 from the first quarter 2007 primarily as a result ofrecording $615,000 of charges associated with the acceleration of vesting forcertain RSU’s and other equity related charges for the retirement of our formerCEO.  Additionally, during the firstquarter of 2008 our Compensation Committee approved the grant of time-based andmarket condition-based restricted stock units to our officers, and directors,which also increased the stock-based compensation.  The awards will vest over two or three yearsand in some cases are subject to the achievement of certain performance goals.

 

*Netinvestment income**.** *Net******investmentincome increased slightly to $897,000 in the first quarter of 2008 as comparedto $879,000 in the first quarter of 2007.

 

*Interest expense.  *Interest expense resultsfrom borrowings under our $250 million unsecured line of credit obtained in thesecond quarter of 2006, which we used to finance a portion of the LANDeskacquisition and share repurchases.Interestexpense declined to $1.8 million in the first quarter 2008, compared to $2.2million in the first quarter of 2007 due to lower borrowings and lower interestrates on our line of credit.  The balanceon our line of credit decreased to $140 million as of March 28, 2008compared to $150 million as of March 30, 2007.

 

*Other income (expense), net.*  Net otherincome (expense) improved from an expense of $317,000 in the first quarter of2007 to income of $455,000 in the first quarter of 2008.  The improvement is the result of increasednet foreign currency translation gains of approximately $680,000 over thecomparative periods.

 

*Provision for income taxes.*  The effective tax ratein the first quarter of 2008 was 55.8% compared to an effective tax rateof  11.2% in the first quarter of2007.  The provision for income taxes was$925,000 for the first quarter of 2008, compared to $94,000 in the firstquarter of 2007.  The increase in theeffective tax rate was primarily the result of the expiration of the U.S.Research and 

 

18

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Development Tax Credit,which as of March 28, 2008 has not been reinstated, expenses related tostock options, and additions in our reserves for uncertain tax positions lessother reductions adjusted for accrued interest expense net of federalbenefit.  We adopted FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109” on January 1, 2007.  As of March 28, 2008, we had totalreserves for uncertain tax positions related to gross unrecognized tax benefitsof $5.3 million of which $3.5 million, if recognized, would affect theeffective tax rate.

 

*Net income.*  Net income for the first quarter of 2008 was$731,000 compared to $746,000 for the first quarter of 2007, as a result of thefactors detailed in the above discussion. Net income, as a percentage of sales for the first quarter of 2008 was0.5%, compared to 0.6% for the first quarter of 2007.

 

**Liquidity and Capital Resources**

 

Asof March 28, 2008, our principal sources of liquidity consisted of $98million in cash and cash equivalents and a $250 million unsecured five yearrevolving bank line of credit that is available for general corporatepurposes.  We plan to use borrowingsunder the line of credit to continue funding the purchase of shares in 2008under our stock repurchase program and for strategic acquisitions oftechnologies or companies that we believe will enhance and/or complement ourexisting products and technologies and increase our sales.  The line of credit currently bears aninterest rate of LIBOR plus 70 basis points. There was $140 million outstanding under the line of credit as of March 28,2008.  We classify the entire obligationas long-term as it carries a five year term and has no payment schedule.  We expect to repay the borrowings from futurecash flows from operations.  A summary ofour cash flows is as follows:

 
| ** **                               | ** ** | **Three months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 28,   2008**   | ** ** | **March 30,   2007** | ** ** |
| Total cash  provided by (used in):       |       |                             |       |   |   |
| Operating  activities                    |       | $                                | 4,701      |   | $ | 17,844 |   |
| Investing  activities                    |       | 3,620                            |       | (16,504 | ) |
| Financing  activities                    |       | (17,824                          | )          | (11,825 | ) |
| Effect of  exchange rate changes on cash |       | 2,814                            |       | 24 |   |
| Decrease in cash  and cash equivalents   |       | $                                | (6,689     | ) | $ | (10,461 | ) |

 

The decline in cash flow from operations in the first quarter of 2008 was primarily the result of significant decreases in accounts payable, accrued wages and commissions and income taxes payable, which were offset by higher accounts receivable collections during the first quarter of 2007.  During the first quarter of 2008, we paid $6.0 million to the Internal Revenue Service related to settling previously accrued federal income tax matters.  Additionally, our accounts payable declined by $6.0 million as a result of the timing of inventory receipts and subsequent payments in the first quarter of 2008 compared to the fourth quarter of 2007.  We received a substantial portion of our inventory later in the fourth quarter of 2007 than in the first quarter of 2008, resulting in a higher accounts payable balance at December 31, 2007.  We received our shipments earlier in the first quarter of 2008, which required us to remit payments for the resulting accounts payable prior to March 28, 2008.  Our accounts receivable decreased $3.5 million from December 31, 2007 to March 28, 2008 as a result of continued improved cash collections.

 

Our days sales outstanding (DSO) improved to 63 days at the end of the first quarter 2008 compared to 67 days at the end of the first quarter of 2007.  DSO improved as a result of higher sales in the first quarter of 2008 compared to the first quarter of 2007 and to continued improved cash collections at each of our locations.  Inventories increased slightly from December 31, 2007 to March 28, 2008.  However, our inventory turns improved to 5.7 at the end of the first quarter of 2008 compared to 4.6 at the end of the first quarter of 2007, primarily as a result of our higher sales volume experienced in the first quarter of 2008.

 

Our investing activitiesproduced $3.6 million of positive cash flow in the first quarter of 2008,primarily as we converted matured investments to cash for use in paying downour borrowings under the outstanding line of credit and for purchase of ourtreasury shares.  Our investingactivities in the first quarter of 2007 included cash payments for investmentpurchases.

 

Our financing activitiesused the cash provided by operations and investing activities, as well asadditional borrowings, to repurchase approximately 4 million shares of ourcommon stock during the first quarter of 2008 at a cost totaling $63million.  These treasury shares werepurchased through various brokers under the stock repurchase program approvedby our Board of Directors.  As of March 28,2008 we have approximately 2.4 million shares available for purchase under theprogram.

 

We may use a portion ofour cash and cash equivalents or our line of credit for strategic acquisitionsof technologies and companies that will enhance and complement our existingtechnologies and help increase our sales.

 

19

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**Off-Balance Sheet Arrangements andContractual Obligations**

 

In the ordinary course of our business, we may at any point in timehave a significant amount of contractual commitments not yet recognized in ourfinancial statements.  These commitmentsrelate primarily to our need to schedule the purchase of inventories in advanceof the related forecasted sales to customers. We have longer lead times for the products we purchase from suppliersbased in Asia than those for our U.S. based and European based suppliers.  Our actual contractual commitments aretypically limited to products needed for one to three months of forecastedsales.  The liabilities for theseinventory purchases along with the related inventory assets are typicallyrecognized upon our receipt of the products. We also have at any point in time a variety of short term contractualcommitments for services such as advertising, marketing, accounting, legal, andresearch and development activities.  Theliabilities for these services and the related expenses are typicallyrecognized upon our receipt of the related services.  In our 2007 Form 10-K, we disclosed ouroff-balance sheet arrangements and contractual obligations. At March 28,2008, there have been no material changes to these off-balance sheetarrangements outside the ordinary course of business.  Our line of credit balance increased to $140million at March 28, 2008 from $95 million at December 31, 2007.  The increase in our level of borrowings, ifsustained at the higher level, will result in higher interest payments infuture periods.

 

**Non-GAAP Operational Measures**

 

Tosupplement our consolidated financial statements presented in accordance withGAAP, we present investors with certain non-GAAP operational measures which weuse internally to manage our businesses, including net sales, gross profit,operating expenses, and the resulting operating income, income before taxes,operational net income, and operational earnings per share, all of whichprimarily exclude the effects of amortization and depreciation related topurchase accounting adjustments, stock-based compensation and acquiredin-process research and development expenses and includes the amortization ofthe fair value adjustment to LANDesk deferred revenue related to the purchaseaccounting adjustment to reduce deferred revenue at the acquisition ofLANDesk.  Specifically, we use thefollowing non-GAAP measures:

 
| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| **Non-GAAP Operational Measures** | ** ** | **March 28,  2008**         | ** ** | **March 30,  2007** | ** ** |
|                                        |       |                             |       |   |   |
| Operational net  sales                      |       | $                                | 141,399    |   | $ | 133,932 |   |
| Operational  gross profit                   |       | $                                | 91,145     |   | $ | 84,658 |   |
| Operational  operating income               |       | $                                | 16,999     |   | $ | 18,611 |   |
| Operational net  income                     |       | $                                | 12,660     |   | $ | 12,713 |   |
| Operational  diluted earnings per share     |       | $                                | 0.27       |   | $ | 0.25 |   |

 

·                  The non-GAAP net salesoperational measure consists of net sales increased by the pro formaamortization of deferred revenue of LANDesk at the date of acquisition whichwas reduced to estimated fair value pursuant to purchase accounting under GAAP.  This deferred revenue was completelyamortized on a pro forma basis as of the third quarter of 2007.

 

·                  Thenon-GAAP gross profit operational measure consists of the non-GAAP net salesoperational measure described above, less cost of sales excluding the impact ofstock-based compensation and amortization related to purchase accountingadjustments as they relate to cost of sales.

 

·                  Thenon-GAAP operating expense operational measure consists of GAAP operatingexpenses, excluding the impact of stock-based compensation and amortization anddepreciation related to purchase accounting adjustments as they relate to theparticular operating expense.

 

·                  Thenon-GAAP operating income operational measure consists of GAAP operating incomeadjusted for the non-GAAP operational measures described above.

 

·                  Thenon-GAAP net income operational measure consists of GAAP net income, adjustedby the non-GAAP operational measures described above and the tax effects ofthese non-GAAP operational measures.

 

·                  Thenon-GAAP earnings per share operational measure is calculated by dividing thenon-GAAP net income operational measure described above by GAAP weightedaverage basic and diluted shares outstanding.

 

20

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We provide the followingreconciliations between GAAP and our operational measures:

 
| ** **                              | ** ** | **For the three months ended March 28, 2008** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **GAAP  Financial  Measures**                                                    | ** ** | **Stock-based  Compensation** | ** ** | **Purchase  Accounting  Adjustments** | ** ** | **Non-GAAP  Operational  Measures** | ** ** |
|                                    |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Operational net  sales                  |       | $                                                                                | 141,399    |   | — |   | — |   | $ | 141,399 |   |
| Operational  gross profit               |       | $                                                                                | 91,134     |   | 244 |   | 2,767 |   | $ | 94,145 |   |
| Operational  operating income           |       | $                                                                                | 2,142      |   | 4,553 |   | 10,304 |   | $ | 16,999 |   |
| Operational net  income                 |       | $                                                                                | 731        |   | 3,491 |   | 8,438 |   | $ | 12,660 |   |
| Operational  diluted earnings per share |       | $                                                                                | 0.02       |   | 0.07 |   | 0.18 |   | $ | 0.27 |   |

 
| ** **                              | ** ** | **For the three months ended March 30, 2007** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **GAAP  Financial  Measures**                                                    | ** ** | **Stock-based  Compensation** | ** ** | **Purchase  Accounting  Adjustments** | ** ** | **Non-GAAP  Operational  Measures** | ** ** |
|                                    |       |                                                                             |       |   |   |   |   |   |   |
| Operational net  sales                  |       | $                                                                                | 133,151    |   | — |   | 781 |   | $ | 133,932 |   |
| Operational  gross profit               |       | $                                                                                | 81,015     |   | 179 |   | 3,464 |   | $ | 84,658 |   |
| Operational  operating income           |       | $                                                                                | 2,512      |   | 3,661 |   | 12,438 |   | $ | 18,611 |   |
| Operational net  income                 |       | $                                                                                | 746        |   | 2,656 |   | 9,311 |   | $ | 12,713 |   |
| Operational  diluted earnings per share |       | $                                                                                | 0.01       |   | 0.06 |   | 0.18 |   | $ | 0.25 |   |

 

Webelieve that excluding depreciation and amortization associated with purchaseaccounting adjustments as well as the tax impact of certain purchase accountingelections for prior acquisitions provides meaningful supplemental informationand an alternative presentation useful to investors’ understanding our coreoperating results and trends between periods. Not only are these depreciation and amortization and tax impactadjustments based on amounts assigned in purchase accounting that may havelittle bearing on present or future replacement costs, but they also are basedon management’s estimates of remaining useful lives.

 

Similarly,we believe that excluding stock-based compensation expense provides meaningfulsupplemental information and an alternative presentation useful to investors’understanding of our core operating results and trends, especially whencomparing those results on a consistent basis to results for previous periodsand anticipated results for future periods.

 

Wealso believe that, in excluding stock-based compensation expense anddepreciation and amortization associated with purchase accounting adjustments(together with the related tax effects), our non-GAAP financial measuresprovide investors with transparency into the information and basis used bymanagement and our Board of Directors to measure and forecast our results ofoperations, to compare on a consistent basis our results of operations for thecurrent period to that of prior periods, to compare our results of operationson a more consistent basis against that of other companies in making financialand operating decisions, and to establish targets for management incentivecompensation.

 

Thesenon-GAAP operational measures have historically been used as key performancemetrics by our senior management as they evaluate both the performance of theconsolidated financial results as well as those of individual businesssegments.  These non-GAAP operationalmeasures are reviewed individually as well as in total in measuring ourperformance against internal and external expectations for the period and theexpectations for such key non-GAAP operational measures are the basis for anyfinancial guidance provided by management for future periods.  We believe that the use of each of thesenon-GAAP financial measures provides enhanced consistency and comparabilitywith our past financial reports, and also facilitates comparisons with othercompanies in our industry, many of which use similar non-GAAP financialmeasures to supplement their GAAP results.  We provide this information toinvestors to enable them to perform additional analyses of past, present andfuture operating performance, compare us to other companies, and evaluate ourongoing financial operations.

 

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Webelieve that each of these operational measures is useful to investors in theirassessment of our operating performance and the valuation of our company. Adjusted net sales, gross profit, operating expenses and income,operational income before taxes, operational net income, and operationalearnings per share are significant measures used by management for:

 
| · |   | Reporting  our financial results and forecasts to our Board of Directors;                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                        |
| · |   | Evaluating  the operating performance of our company;                                                       |
|   |   |                                                                                                        |
| · |   | Managing  and comparing performance internally across our businesses and externally  against our peers; and |
|   |   |                                                                                                        |
| · |   | Establishing  internal operating targets.                                                                   |

 

Thesenon-GAAP operational measures, including net sales, gross profit, operatingincome, operational net income, and operational earnings per share are used byus as broad measures of financial performance that encompass our operatingperformance, cash, capital structure, investment management, and income taxplanning effectiveness.  These operational measures are not calculated inaccordance with GAAP, and should be considered supplemental to, and not as asubstitute for, or superior to, financial measures calculated in accordancewith GAAP.  These operational measures have limitations in that they donot reflect all of the costs or reductions to revenues associated with theoperations of our business as determined in accordance with GAAP.  In addition, these operational measures maynot be comparable to non-GAAP financial measures reported by othercompanies.  As a result, one should not consider these measures in isolationor as a substitute for analysis of our results as reported under GAAP.  Wecompensate for these limitations by analyzing current and future results on aGAAP basis as well as a non-GAAP basis, prominently disclosing GAAP results andproviding reconciliations from GAAP results to operational measures.  Weexpect to continue to incur expenses similar to the non-GAAP adjustmentsdescribed above, and the exclusion or inclusion of these items from ournon-GAAP financial measures should not be construed as an inference that thesecosts are unusual or infrequent.  Some ofthe limitations in relying on our non-GAAP financial measures are:

 

| · |   | The  non-GAAP net sales operational measure is a measure which we have defined for  internal and investor purposes. A further limitation associated with this  measure is that it includes certain revenues and the related impact on  non-GAAP gross profit, operating income, income before taxes, net income, and  earnings per share operational measures that impact our GAAP based measures. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| · |   | The  non-GAAP gross profit, operating income, net income, and earnings per share  operational measures are limited in that they do not include the impact of  stock-based compensation expense or specific costs and benefits associated  with certain purchase accounting adjustments.                                                                                                            |

 

Wecompensate for these limitations by prominently disclosing the reported GAAPresults and providing investors with reconciliations from GAAP to the non-GAAPmeasures in the financial tables above.

 

**Recently Issued AccountingStandards and Regulatory Standards**

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements”* (SFAS 157), which clarifies that fair value estimatesshould be based on the assumptions market participants would use when pricingan asset or liability and establishes a fair value hierarchy that prioritizesthe information used to develop those assumptions.  Under SFAS 157, fair value measurements wouldbe separately disclosed by level within the fair value hierarchy.  SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007. On February 12, 2008, the FASB delayed the effective date of SFAS157 for nonfinancial assets and liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years beginning after November 15,2008.  We adopted SFAS 157 as of January 1,2008, with the exception of the application of the statement to nonfinancialassets and nonfinancial liabilities. Refer to Note 11 to the CondensedConsolidated Financial Statements for additional discussion on fair valuemeasurements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115”*(SFAS 159).  SFAS No. 159permits an entity to elect fair value as the initial and subsequent measurementattribute for many financial assets and liabilities.  Entities electing the fair value option wouldbe required to recognize changes in fair value in earnings.  Entities electing the fair value option arerequired to distinguish, on the face of the statement of financial position,the fair value of assets and liabilities for which the fair value option hasbeen elected and similar assets and liabilities measured using anothermeasurement attribute.  SFAS 159 iseffective for fiscal years beginning after November 15, 2007.  The adjustment to reflect the differencebetween the fair value and the carrying amount would be accounted for as acumulative-

 

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effect adjustment toretained earnings as of the date of initial adoption.  We have adopted SFAS 159 and have elected notto measure any additional financial instruments or other items at fair value.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “*Business Combinations”* (SFAS 141(R)),which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how anacquirer in a business combination recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anycontrolling interest; recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase; and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination.  FAS 141(R) is to be appliedprospectively to business combinations for which the acquisition date is on orafter an entity’s fiscal year that begins after December 15, 2008.  We will assess the impact of SFAS 141(R) ifand when a future acquisition occurs, however the application of SFAS 141(R) willresult in a significant change in accounting for future acquisitions after theeffective date.

 

In March 2008, theFASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS No. 161).SFAS No. 161 requires companies with derivative instruments to discloseinformation that would enable financial statement users to understand how andwhy a company uses derivative instruments, how derivative instruments andrelated hedged items are accounted for under SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities*,”(SFAS No. 133) and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows. Thenew requirements apply to derivative instruments and non-derivative instrumentsthat are designated and qualify as hedging instruments and related hedged itemsaccounted for under SFAS 133. SFAS 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008; however, early application is encouraged.

 

**Updates to Critical AccountingEstimates**

 

As discussed below and in Note 11 to the Condensed ConsolidatedFinancial Statements, we have adopted SFAS 157 as of January 1, 2008, withthe exception of the application of the statement to nonfinancial assets andnonfinancial liabilities, the deferral of which was permitted under FSP 157-2.Other than this change, there have been no significant changes in our criticalaccounting estimates during the first three months of 2008.

 

Substantially all of our financial assets and liabilities are measuredat fair value based upon Level 2 inputs, as defined under SFAS 157. The fairvalue measurement is prepared  using theclosing mid-market rate/price environment on March 28, 2008, usingproprietary models, available market data, and reasonable assumptions.

 

**Item 3.**  **Quantitative and QualitativeDisclosures About Market Risk.**

 

Our primary market risk is the interest rate risk on our bank line ofcredit, which currently bears interest at a variable rate of LIBOR plus 70basis points.  We have partially hedgedthis exposure to interest rate risk with an interest rate swap, which has aremaining notional amount of $60 million, through a well established financialinstitution.

 

We also face foreigncurrency exchange rate risk to the extent that the value of certain foreigncurrencies relative to the U.S. dollar affects our financial results.  Our international operations transact asignificant portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenue, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies.  As of March 28, 2008, we hadthree open forward contracts with an approximate fair value of $20,000.

 

**Item 4.**  **Controls and Procedures.**

 

(a) *Evaluation of disclosurecontrols and procedures.*   Based on their evaluation as of March 28, 2008, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) are effective.

 

(b) *Changes in internal control over financial reporting*.    There were no changes in our internalcontrols over financial reporting during the quarter ended March 28, 2008that materially affected or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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### **PART II —OTHER INFORMATION**

### ** **

**Item 1.****  ****Legal Proceedings.**

 

In March 2006, TFSElectronic Manufacturing Services, Inc. (TFS) filed a Third-PartyComplaint and an Objection to Claim of Avocent Corporation with the UnitedStates Bankruptcy Court, District of Arizona. As a result of the complaint, an adversary proceeding wascommenced against us in the TFS bankruptcy case in an effort to disallow ourbankruptcy claim against TFS in its entirety. TFS also seeks damages in an undetermined amount for our alleged breachof contract, negligence, negligent misrepresentations, breaches of warranty,unjust enrichment, disparagement of TFS’ business, and quantum merit.  TFS is seeking recovery of actual damages,punitive damages, attorneys’ fees, pre- and post-judgment interest, costs fromus.  We have entered into a SettlementAgreement with TFS and we are awaiting Bankruptcy Court approval.

 

In January 2007,we filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Washington against Aten Technology, Inc.,Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, and Trippe Manufacturing Company.  The defendants filed counterclaims allegingnon-infringement, unenforceability, and invalidity.  In May 2007, we entered into aSettlement and License Agreement with Trippe Manufacturing, and dismissedTrippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office.  Thatre-examination is currently underway.

 

In March 2007, KBM Enterprises, formerlya contract manufacturer for Avocent, filed a complaint against us in theCircuit Court of Madison County, Alabama, seeking $9,500 for costsallegedly incurred by KBM in its manufacturing efforts on behalf ofAvocent.  We have filed an answer andcounterclaims against KBM and one of its principals.  Discovery is currently underway.

 

In April 2007, wefiled a complaint for declaratory judgment against Aten International Co., Ltd.in the United States District Court for the Northern District of Alabama.  We are seeking a declaratory judgment thattwo patents owned by Aten and asserted against us are invalid and that certainof products alleged by Aten to infringe do not infringe these patents.  In August 2007, Aten’s motion to dismissfor lack of personal jurisdiction was granted, and we have appealed that rulingto the Federal Circuit Court of Appeals. Oral arguments were held in February 2008.

 

In November 2007,Gemini IP, LLC filed a complaint for patent infringement in the United StatesDistrict Court for the Eastern District of Texas, Sherman Division, againstAvocent Corporation and our subsidiary LANDesk Software, Inc.  The complaint alleges infringement of aGemini patent through the sales of a LANDesk product.  The complaint seeks injunctive relief,damages, attorneys’ fees, and costs. Avocent Corporation was dismissed from the lawsuit in January 2008,and we have made a claim for indemnification against the LANDesk escrowaccount.  In April 2008, theDistrict Court stayed the action pending a review of the Gemini Patent by the Patentand Trademark Office.

 

We acquired LANDesk Group Limited, a privately-held company, in August 2006,and the acquisition agreements provided for total initial consideration ofapproximately $407 million and a potential earn-out payment to the formershareholders of LANDesk of up to $60 million if LANDesk achieved specifiedrevenue targets for 2006.  Based onLANDesk’s 2006 revenue results, we concluded that LANDesk did not achieve theminimum revenue target required to cause an earn-out payment and that noearn-out was earned or payable. Accordingly, we did not pay, and have not accrued, for any earn-outpayment.  The Shareholder Representativefor the former LANDesk shareholders instituted the arbitration proceduredescribed in the acquisition agreements and is challenging our conclusion thatno earn-out was earned or payable. We intend to vigorously defend our position in sucharbitration but can give no assurance relative to the outcome of that proceeding.

 

**Item1A.  Risk Factors.**

 

*THISQUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE DISCUSSED IN THIS QUARTERLY REPORT. THESE RISKS AND UNCERTAINTIES INCLUDING THE FOLLOWING:*

 

**We have acquired, and expect tocontinue to acquire, technologies, and companies and these acquisitions coulddisrupt our business or expose us to other risks.**

 

A key component of ourengineering and product development strategy and our future growth is theinvestment in or the acquisition of technologies and companies.  We intend to continue to execute our strategythrough the acquisition of technologies or companies or through investments incomplementary companies, products, personnel, or technologies, and it is likelywe will complete such acquisitions or investments in the future.  These acquisitions and investments involvemany risks and factors outside our control, including the following:

 

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| · |   | Difficulty integrating  the acquired company’s personnel, distribution channels, products, product  roadmaps, technologies, systems, processes, and operations, including product  delivery, order management, and information systems;                                                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Difficulty in  conforming the acquired company’s financial policies and practices to our  policies and practices and in implementing and maintaining adequate internal  systems and controls over the financial reporting and information systems of  the acquired company;                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Diversion of  management’s attention and disruption of our current business and the  challenges associated with managing the resulting larger company following  any acquisition;                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Difficulty in combining  product and technology offerings and entering into new markets (such as  software) or geographical areas in which we have no or limited direct  experience and where our competitors may have stronger market positions;                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Loss of management,  sales, technical, or other key personnel (at either Avocent or in the  acquired company) or the loss of customers, distributors, resellers, vendors,  or other business relationships as a result of the acquisition;                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Revenue from the  acquired companies not meeting our expectation, and the potential loss of the  acquired companies’ customers, distributors, resellers, suppliers, or other  partners;                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Delays or difficulties  and the attendant expense in evaluating, coordinating, and combining  administrative, manufacturing, research and development and other operations,  facilities, and relationships with third parties in accordance with local  laws and other obligations while maintaining adequate standards, controls and  procedures, including financial controls and controls over information systems; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Difficulty in  completing projects associated with acquired in-process research and  development;                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Incurring amortization  expense related to certain intangible assets and recording goodwill and  non-amortizable assets that will be subject to impairment testing and  possible impairment charges;                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Dilution of existing  stockholders as a result of issuing equity securities, including the  assumption of any stock options or other stock awards to employees issued by  the acquired company;                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Overpayment for any  acquisition or investment or unanticipated costs or liabilities;                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Assumption of  liabilities of the acquired company, including any potential intellectual  property infringement claims or other litigation and any unrecorded tax  obligations; and                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Incurring substantial  write-offs, restructuring charges, interest expense, amortization, and  transactional expenses.                                                                                                                                                                                                                                                                                                 |

 

Our integration plans andindemnification and escrow agreements might fail to adequately mitigate theserisks and factors, and our failure to manage these risks and challenges couldmaterially harm our business, financial condition, and results ofoperations.  Further, if we do notsuccessfully address these challenges in a timely manner, we may not fullyrealize all of the anticipated benefits or synergies on which the value of atransaction was based.  Futuretransactions could cause our financial results to differ materially fromexpectations of market analysts or investors for any given quarter.

 

**Intensecompetition from new and existing competitors or consolidation in the serverand systems management sectors could impair our ability to grow our business,to sustain our profitability, and to sell our products and technologies.**

 

The markets forour products and technologies are highly fragmented, rapidly evolving, andintensely competitive, and we expect these characteristics to continue andincrease.  Aggressive competition from both hardware and software productsand technologies could lengthen the customer evaluation process and result inprice reductions and loss of sales, which would materially harm ourbusiness.  Our business is highly sensitive to the introduction of newproducts and technologies (such as virtualization), price changes, andmarketing efforts by numerous and varied competitors.  Accordingly, ourfuture success will be highly dependent upon our timely completion andintroduction of new products and technologies and features at competitiveprices and performance levels that address changing industry trends and theevolving needs of our customers.  We continue to experience aggressiveprice competition and increased customer sensitivity to product prices, andpricing and margin pressures are likely to increase in the future.  

 

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Because of thiscompetition, we may have to continue to lower the prices of many of ourproducts and technologies or offer greater functionality within our products todeliver greater value to customers to stay competitive, while at the same timetrying to maintain or improve our revenue and gross margin.  Because ourbusiness model is based on providing innovative and high quality products, wemay spend a proportionately greater amount on research and development thansome of our competitors.  If we cannot proportionately decrease our coststructure on a timely basis in response to competitive price pressures, ourgross margin and profitability could be adversely affected.  In addition,if our pricing, functionality, and other factors are not sufficientlycompetitive, or if there is an adverse reaction to our product decisions, wemay lose market share in certain areas, which could adversely affect ourrevenue and prospects.

 

We compete for sales ofswitching systems and extension products with companies such as RaritanComputer, Rose Electronics, Minicom Advanced Systems, Aten International,Belkin, Digi International, and Lantronix.  These products also facecompetition from software providers (such as Microsoft, Computer Associates, Tivoli,Symantec, Novell, AMI, and BMC Software), who may be able to offer softwareproducts competitive with our hardware products at a much lower cost or evenbundled for free, and from server manufacturers (including our OEM customers),who are able to offer their competitive technologies or products at the time ofthe server sale.  These competitive software and hardware products addressmany of the problems our switching systems and technologies, extensionproducts, and remote access products are designed to address.

 

We compete for sales ofour systems management and security products with companies such as Microsoft,Computer Associates, BMC Software, Novell, and Symantec, many of whom havegreater financial, technical, and marketing resources, a larger customer base,a longer operating history, greater name recognition, and more establishedrelationships in the industry than we do, and may offer their own orthird-party competitive software products at a lower cost or bundled for freewith their other products.  Microsoft, in particular, has deliveredcompetitive products and announced its intention to continue to developcompetitive software.  If Microsoft issuccessful in delivering software products that are competitive with ourproducts, our ability to grow our software business may be limited.

 

Our current and potentialcompetitors may be able to respond more quickly to new or emerging technologiesor products and to changes in customer requirements or to devote greaterresources to the research, development, promotion, sale, and support of theirproducts and technologies than we do.  In addition, current and potentialcompetitors have established or may establish cooperative relationships amongthemselves or with third parties that expand or enhance the ability of theirproducts and technologies to address the needs of our current and prospectivecustomers.  Some of these competitors can also bundle hardware, software,and services together, and offer a more complete set of hardware products andservices than we are able to offer. We may not be able to compete successfullyagainst current and future competitors and competitive pressure may materiallyharm our business, financial condition, operating results, and cash flows, orimpair our ability to achieve our desired results.

 

Certain of our customers,such as Dell, Hewlett-Packard, IBM, Symantec, and Microsoft, presently offercompetitive hardware and/or software products and technologies that addressmany of the problems our products and technologies address.  Thesecustomers could decide to manufacture or enhance their own switching, IPMI orother embedded technologies, or systems management or security products, oroffer products or technologies supplied by competitors.  Companies withhardware manufacturing experience or network management products, many of whichare substantially larger than we are and have significantly more financialresources than we do, also offer products or technologies that compete withus.  Established companies with hardware manufacturing or networkmanagement experience (such as Intel, Cisco, or EMC) could also offer newproducts, new technologies (such as virtualization), or new solutions thatcompete with, or reduce the demand for, our products and technologies.

 

There has beenconsolidation in the markets in which we compete, which we believe willcontinue and could lead to increased price competition and other forms ofcompetition as companies attempt to maintain or extend their market positionsin the rapidly changing IT industry.  Inaddition, we may face competition in the future from large establishedcompanies or from emerging companies that have not previously entered themarket or that do not currently have products that directly compete with ourproducts.  This could lead to morevariability in our operating results due to lengthening of the customerevaluation process and/or the loss of business to these competitors, which mayadversely affect our business, financial condition, and results of operations.

 

**Our failureto respond to rapid technological change or to introduce successful newproducts and technologies may result in reduced revenue or revenue growth.**

 

The process of developingor acquiring new products, software, and technologies and enhancing existingproducts, software, and technologies is complex, costly, and uncertain, and anyfailure by us to anticipate customers’ changing needs and emergingtechnological trends accurately could significantly harm our market share andresults of operations.  We must make long-term investments, develop orobtain appropriate intellectual property, and commit significant resourcesbefore knowing whether our predictions will accurately reflect customer demandfor our products and services.  After we develop a product, we must thenaccurately forecast volumes and configurations that meet customer requirements,manufacture appropriate hardware volumes quickly and at low cost and developcost-effective software solutions, and train our sales force andresellers.  Any delay in the development, 

 

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production, marketing of,or training for new products or technologies could result in our not beingamong the first to market, which could further harm our competitive position.

 

Sales of switching,extension, and remote access products and technologies are characterized byrapid technological advances, frequent new product and technologicalintroductions and enhancements, and significant price competition.  If wedo not keep pace with these changes, we will lose customers, and our businesswill be adversely affected.  The introduction of products or technologiesincorporating superior alternatives such as switching software, the emergenceof new industry standards, or changes in pricing structure could render ourexisting products and technologies and those under development obsolete orunmarketable.  New technologies offered by us or our competitors couldcompete with our existing products at a lower price, which could reduce our revenue.

 

Our hardware productscombine components, such as printed circuit boards, connectors, semiconductors,memory, cable assemblies, power supplies and enclosures that are manufacturedby other companies and are generally available to competitors and potentialcompetitors.  Our software products combine software or content from thirdparties, such as open source software or technology, drivers, security, oranti-virus information, which may also be generally available to ourcompetitors and potential competitors.  Our future success will depend inlarge part upon continued innovative application of commercially availablecomponents and third-party software or technology, and continued enhancementsto our proprietary hardware, software, firmware, and other technologies, theexpansion and enhancement of existing products and technologies, and ourdevelopment and introduction of new products and technologies that addresschanging industry trends and customer needs on a cost-effective and timelybasis.  If we fail to respond on a timely basis to technologicaldevelopments, changes in industry standards, customer requirements, competitiveproducts, product localization, or software innovations, we will losecustomers, and our business will be greatly harmed.  Similar results couldoccur if we experience significant delays in the development or introduction ofnew products or technologies.

 

Due to our significantreliance on OEM relationships, our hardware development efforts may often befocused on developing new products, technologies, or enhancements for OEMcustomers.  As a result, our OEM relationships may negatively affect ourability to develop new and enhanced products and technologies for our non-OEMcustomers.  Moreover, these new products, technologies, or enhancementsfor OEM customers may not be available to, or readily marketable to, othercustomers without significant modification and delay.  The expansion,termination, or significant disruption of our relationship with certainOEMs or other customers for whom we devote significant product developmentresources is likely to result in lost opportunities with respect to thedevelopment of products, technologies, or enhancements for our other customers.

 

**We havelimited protection of proprietary rights and face risks of third-partyinfringements.**

 

Our future successdepends in part upon our ability to protect proprietary rights in our productsand technologies.  We seek to protect our intellectual property rights byinvoking the benefits of the patent, trademark, copyright, trade secret, andunfair competition laws of the United States and other countries andprotections provided by confidentiality and nondisclosure agreements and otherlegal agreements.  These laws and practices, however, afford only limitedprotection.  There can be no assurance that the steps we have taken toprotect our intellectual property rights, or that the steps we take in thefuture, will be adequate to prevent or detect misappropriation of ourintellectual property or technologies or that our competitors will notindependently develop proprietary or other technologies that are substantiallyequivalent or superior to our products or technologies.  In addition, our proprietary information maybe misused or improperly disclosed by third parties entrusted with thisinformation.  There also can be noassurance that our proprietary rights will not be challenged, invalidated, oravoided.

 

The U.S. Patent andTrademark Office has issued several patents to us for various aspects of ourproducts.  We have various corresponding patent applications pending underthe provisions of the Patent Cooperation Treaty, which permits the filing ofcorresponding foreign patent applications in numerous foreign countries withina limited time period.  We also have other United States and foreignpatent applications pending.  There can be no assurance that anyadditional patents will be issued from any of those pending applications orthat any patents will be issued in any additional countries where our productscan be sold.  Claims allowed in our patents or in any pending patentapplications may not be of sufficient scope or strength for, or providemeaningful protection or any commercial advantage to us or such claims may notbe upheld if challenged.  Also, competitors may develop their ownintellectual property or technologies, obtain their own patents, or challengethe validity of, or be able to design around, our patents.  The laws ofcertain foreign countries in which our products are or may be developed, manufactured,or sold (particularly certain countries in Asia) may not protect our productsor intellectual property rights to the same extent as do the laws of the UnitedStates and thus increase the likelihood of piracy of our technologies andproducts.

 

We may initiate claims orlitigation against other third parties for infringement of proprietary rightsor to establish the validity of proprietary rights.  Similarly, ourcompetitors or other third parties may initiate claims or litigation against usalleging infringement of their proprietary rights or improper use of theirintellectual property, and from time to time, third parties notify us that ourproducts may infringe their intellectual property rights, which regardless ofmerit, requires our time and resources to evaluate and respond.   Existing litigation, and any otherlitigation relating to intellectual property to which we become a party, issubject to numerous risks 

 

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and uncertainties,including the risk of counterclaims or other litigation against us, and we maynot be successful in any such litigation.  Dealing with adverse claims andlitigation is expensive, and the existing litigation or any other litigation byor against us could result in significant additional expense, divert theefforts of technical and management personnel, whether or not such litigationresults in a favorable determination, harm our relationships with existingcustomers, and deter future customers from purchasing or licensing ourproducts.  In the event of an adverse result in any such litigation, wecould be required to pay substantial damages, suspend or cease the development,manufacture, use, marketing, and sale of any infringing products, expendsignificant resources to redesign products or develop non-infringingtechnology, discontinue the use of certain processes, or obtain licenses to theinfringing technology.  There can be no assurance that we would besuccessful in such development or that such licenses would be available onreasonable terms, or at all, and any such development or license could requireus to expend substantial time and other resources.  In the event that anythird party makes a successful claim against us, or our customers, and alicense is not made available on commercially reasonable terms, our business,financial condition, and results of operations could be adverselyaffected.  In addition, any disputeinvolving our intellectual property could result in our customers,distributors, or resellers becoming involved in the litigation, which couldtrigger indemnification obligations in certain of our sales, license, orservice agreements.

 

The IT industry ischaracterized by vigorous pursuit and protection of intellectual propertyrights or positions, which has resulted in significant and often protracted andexpensive litigation.  We have in the past been, and we may from time totime in the future be, a party in litigation or other proceedings alleginginfringement of intellectual property rights owned by third parties.  Ifnecessary or desirable, we may seek licenses under such intellectual propertyrights.  However, licenses may not be offered on terms acceptable to us,or at all.  The failure to obtain a license from a third party fortechnology used by us could cause us to incur substantial liabilities and tosuspend or cease the manufacture of products requiring such technology. Additionally, current or future competitors could obtain patents or otherintellectual property rights that may prevent us from developing or selling ourproducts. The result of these litigation matters is difficult to predict and anunfavorable resolution could affect our operating results, business, orfinancial condition. The resolution of litigation involving the company mayimpact our operating results or financial condition.

 

**Weare likely to experience fluctuations in operating results.**

 

We have in the pastexperienced substantial fluctuations in revenue, bookings, and operatingresults, on a quarterly and an annual basis, and we expect these fluctuationswill continue in the future.  Our operating results will be affected by anumber of factors, including, but not limited to:

 

| · |   | The volume, timing,  pricing, and contractual terms of orders, particularly from OEMs, resellers,  and other large customers, a significant portion of which tend to occur late  in each quarter;                                                                                                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | The timing of  shipments;                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | The unpredictable  nature of the sales cycle for software products and the timing and completion  of delivery of software products;                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | The timing of new  product introductions, new technologies, and enhancements by us and by our  competitors, and the possibility that customers may defer purchases of our  products in anticipation of these new products, new technologies, and  enhancements;                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Changes in or our  failure to accurately predict product or distribution and reseller channel  mixes, including changes in the mix of software licenses in which revenue is  recognized upfront as opposed to subscription licenses that are deferred over  time and changes in the mix of revenue attributable to higher-margin products  as opposed to lower-margin sales or services; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Changes in demand for  our products and services;                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Changes in pricing  policies or price reductions;                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Changes in laws,  regulations, or other government requirements;                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Changes in renewal  rates for software upgrade protection or maintenance;                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Competition from new  products, technologies, business models, and price reductions by competitors;                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | The availability and  cost of supplies, components, or third-party code or content on commercially  reasonable terms;                                                                                                                                                                                                                                                                    |

 

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| · |   | Compatibility or  interoperability of our products with third-party systems and applications;                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                |
| · |   | Sales and marketing  expenses related to entering into new markets, introducing new products, new  technologies, and retaining current OEMs, resellers, and other large  customers; |
|   |   |                                                                                                                                                                                |
| · |   | Fluctuations in sales  of servers and personal computers due to changes in technology (such as  virtualization), economic conditions, or capital spending levels;                   |
|   |   |                                                                                                                                                                                |
| · |   | The amount and timing  of operating expenses and capital expenditures relating to the expansion of  our business and operations; and                                                |
|   |   |                                                                                                                                                                                |
| · |   | Costs associated with  legal proceedings, including legal fees and any adverse judgments or  settlements.                                                                           |

 

Our operating resultswill continue to be affected by seasonal trends, by general conditions in theIT market, and by general economic conditions.  We have experienced, andwe expect to continue to experience, some degree of seasonality due to customerbuying cycles and delays in customer orders during unfavorable economicperiods.  We believe that the third and fourth quarters will generallyhave higher net sales levels due to customer budgeting and procurement cycles,which may depress net sales in other quarters.  In addition, Europeansales are often weaker during the summer months.  In the past, we havetypically seen a sequential decline in revenue from the fourth quarter of ayear to the first quarter of the following year, and while it is difficult topredict revenue in any quarter, we expect that this pattern will continue inthe future.  Many of the factors that create and affect seasonal trendsare beyond our control.

 

Our quarterly sales havealso reflected a pattern in which a disproportionate percentage of each quarter’stotal sales occur toward the end of the quarter, and this trend has become morepronounced in recent periods.  Ourincreased focus on the software market continues this trend with a greaterproportion of our software revenue coming from software license andsubscriptions booked in the last weeks or days of each quarter.  Thisuneven sales pattern makes prediction of revenue, earnings, and working capitalfor each financial period difficult, increases the risk of unanticipatedvariations in quarterly results and financial condition, and places pressure onour hardware inventory management and logistics systems.  If predicteddemand for hardware is substantially greater than orders, there will be excessinventory.  Alternatively, if hardware orders substantially exceedpredicted demand, we may not be able to fulfill all of the orders received inthe last few weeks of each quarter.  Other developments late in a quarter,such as a systems failure, component pricing movements, actions orannouncements from our competitors, global logistics disruptions, or largesales opportunities not being completed when predicted, could adversely impactinventory levels and results of operations in a manner that is disproportionateto the number of days in the quarter affected. In addition, accounting requirements associated with satisfying thevarious elements necessary to recognize software revenue may result insignificant fluctuations in our quarterly results.

 

In order to remaincompetitive and provide our increasingly sophisticated customers with moreoptions, we have made and expect to continue to make new products and newsoftware purchasing and licensing options available to our customers.  These new products and options may result inan increase in contracts where software revenue is deferred or cash is receivedover time as opposed to recognition of revenue or payment at or about the timeof the purchase or license.

 

We believe thatquarter-to-quarter comparisons of our historical financial results are notmeaningful indicators of our future operating results, and you should not relyon them as an indication of our future performance.  If our quarterlyoperating results fail to meet the expectations of equity research analysts,the price of our common stock could be negatively affected.

 

**Ourgross margins are expected to vary and may decline.**

 

Gross margins may vary ordecline from period-to-period and may be adversely affected by a number offactors, including:

 
| · |   | The ratio of OEM sales  to branded sales, since OEM sales typically have lower gross margins than  branded sales;                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                         |
| · |   | The ratio of sales  through indirect channels to direct sales, since indirect sales typically  have lower gross margins than direct sales;                                                                                   |
|   |   |                                                                                                                                                                                                                         |
| · |   | The ratio of sales in  established markets to sales in new markets with different pricing and cost  structures;                                                                                                              |
|   |   |                                                                                                                                                                                                                         |
| · |   | Changes in product mix,  because sales of some of our products and technologies will have lower gross  margins than sales of other products or technologies (e.g. our software  products tend to have higher gross margins); |

 

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| · |   | Increased price  competition;                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                 |
| · |   | Changes in product  costs and sales discounts;                                                                       |
|   |   |                                                                                                                 |
| · |   | Changes in raw materials,  freight, regulatory, certification, import or export expenses, tariffs, and  labor costs; |
|   |   |                                                                                                                 |
| · |   | Introduction of new  products, services, business models, and technologies by us and by our  competitors;            |
|   |   |                                                                                                                 |
| · |   | The level of and costs  for third-party technology and code used in our software products; and                       |
|   |   |                                                                                                                 |
| · |   | The level of and costs  for outsourcing of our manufacturing and assembly services for our hardware  products.       |

 

We expect that our grossmargins may vary and may decline in the future primarily due to the factorslisted above and to increased competition and the introduction of new productsand technologies that may affect product prices and demand for our products.

 

**Asubstantial portion of our business consists of sales to a limited number ofresellers and distributors that are not obligated to continue doing businesswith us, and these sales vary considerably from quarter to quarter.**

 

A substantialportion of our sales consists of sales of our branded products to a limitednumber of resellers and distributors.  Sales to resellers anddistributors represented approximately 56% of net sales in 2007, 56% ofnet sales in 2006, and 48% of net sales in 2005.  The loss of significantrevenue opportunities with these resellers and distributors could negativelyimpact our results of operations.  Inaddition, many of these customers also have or distribute competingproducts.  If resellers and distributorselect to increase the marketing of competing products or reduced marketing ofour products, our ability to grow our business will be negatively impacted andwill impair one of our substantial revenue sources.

 

Our reseller anddistributor business is subject to many risks, including:

 
| · |   | Concentration of  business in a limited number of resellers and distributors could result in  significant damage to our business upon the termination of a reseller  relationship;                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                |
| · |   | Termination of reseller  and distributor agreements or reduced or delayed orders;                                                                                                                                   |
|   |   |                                                                                                                                                                                                                |
| · |   | Difficulty in  predicting sales to resellers and distributors who do not have long-term  commitments to purchase from us, which requires us to maintain sufficient  inventory levels to satisfy anticipated demand; |
|   |   |                                                                                                                                                                                                                |
| · |   | Lack of visibility of  end user customers and revenue recognition and channel inventory issues  related to sales by resellers and distributors;                                                                     |
|   |   |                                                                                                                                                                                                                |
| · |   | Resellers and  distributors electing to resale or increase their marketing of competing  products or technologies or reduced marketing of our products; and                                                         |
|   |   |                                                                                                                                                                                                                |
| · |   | Changes in corporate  ownership, financial condition, credit worthiness, payment patterns, business  direction, sales compensation related to our products, or product mix by the  resellers and distributors.      |

 

Any of these risks couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourresellers and distributors, which may in the future have a material adverseeffect on our quarterly sales and operating results.

 

The loss of one or morelarge reseller or distributors could materially harm our business.  Whilewe have reseller and distributor agreements, none of our resellers ordistributors are obligated to purchase products from us.  Consequently,any reseller or distributor could cease doing business with us at anytime.  Our dependence upon a few resellers and distributors could resultin a significant concentration of credit risk, thus a substantial portion of ourtrade receivables outstanding from time to time may be concentrated among alimited number of customers.  In addition, the inability to accuratelyforecast the timing and volume of orders for sales of branded products toresellers and distributors during any given quarter could adversely affectoperating results for such quarter and, potentially, for future periods. If we underestimate sales, we will not be able to fill orders on a timelybasis.  This could cause customer dissatisfaction and loss of futurebusiness.  If we overestimate sales, we will experience increased costsfrom inventory storage, waste, and obsolescence.

 

30

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**We willneed to expand sales through distributors and resellers in order to develop ourbusiness and increase revenue.**

** **

We expect to rely increasingly on distributors andresellers, VARs (including LANDesk VARs who are also referred to as “ExpertService Providers” or “ESPs”), and systems integrators for the distribution andsale of our branded hardware and software products.  Our strategycontemplates the expansion of our distributor and reseller network bothdomestically and internationally, particularly in Asia, and an increase in thenumber of customers licensing our products through these expanded channels. Our future success will depend in part on our ability to attract, train,and motivate new distributors and resellers and expand our relationships withcurrent distributors and resellers.  We may not be successful in expandingour distributor and reseller relationships.  We will be required to investsignificant additional resources in order to expand these relationships, andthe cost of this investment may exceed the margins generated from thisinvestment.  Conducting business throughindirect sales channels presents a number of risks, including:

 

·                                          Difficulties in replacing any lost orterminated distributors or resellers;

 

·                                          Existing or new distributors andresellers may not be able to effectively sell our current or future products orservices;

 

·                                          Potential distributors and resellersdeciding not to enter into relationships with us because of our existingrelationships with other distributors and resellers with which they compete;

 

·                                          Our ability to provide proper trainingand technical support to our distributors and resellers;

 

·                                          The possibility of damage or impairmentto our market position, brands or trademarks as a result of the actions of ourdistributors and resellers;

 

·                                          Distributors and resellers electing toplace greater emphasis on products or services offered by our competitors; and

 

·                                          The lack of direct control over thebusiness practices, marketing, sales and services offered by distributors andresellers.

 

As we expand our distribution and reseller channels,we will also need to expand our sales organization and invest substantialresources toward this expansion.  We mayexperience difficulty recruiting, training, and retaining qualified salespersonnel, and any failure to obtain, train, and keep qualified personnel couldlimit our ability to sell products.

 

In addition, distributors and resellers of ourhardware products often have rights of return, and in the future, these returnsfrom our existing or any new distributors and resellers may have a materialadverse effect on our business, financial condition, and results ofoperations.  Our agreements with our current distributors and resellersare generally nonexclusive and may be terminated on short notice by eitherparty without cause, and any new distributor or reseller agreements are likelyto contain similar provisions.  Distributors and resellers are notobligated to purchase products from us and frequently offer products fromseveral different companies, including competitors’ products, and distributorsand resellers may give higher priority to the sale of our competitors’products.  A reduction in sales efforts or efficiency by our distributorsor resellers could lead to a reduction in our sales and could materiallyadversely affect our business, financial condition, and results of operations.

 

**A substantial portion of our businessconsists of sales to a limited number of OEM customers that are not obligatedto continue doing business with us, and these sales vary considerably fromquarter to quarter.**

 

A substantial portion of our sales is concentratedamong a limited number of OEM customers.  Sales to theseOEMs represented approximately 35% of net sales in 2007, 40% of net salesin 2006, and 48% of net sales in 2005.  Sales to Hewlett-Packardrepresented approximately 12% of net sales in 2007, 14% of our net sales in2006, and 20% of our net sales in 2005.  Sales to Dell representapproximately 12% of net sales in 2007, 14% of net sales in 2006, and 15% ofour net sales in 2005.

 

We have experienced, and we expect to continue toexperience, period-to-period variability in sales to these OEM customers. Any cancellation, rescheduling, or reduction of orders by OEM customers in thefuture could materially adversely affect our operating results.  Althoughour OEM customers typically place orders for products up to several monthsprior to scheduled shipment dates, these orders are subject to cancellation.

 

Our OEM business is subject to many risks, including:

 

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·                                          Contract termination or reduced ordelayed orders;

 

·                                          Short order cycles and difficulty inpredicting sales because our OEM customers do not have long-term commitments topurchase from us;

 

·                                          Changes in the OEMs’ internal productlife cycles including the delay of planned new product introductions anduncertainty over product end-of-life decisions;

 

·                                          Adoption of competing products ortechnologies developed by third parties for the OEMs, acquisition or internaldevelopment of competing products or technologies by the OEMs, or changes inthe OEMs’ marketing of competing products or reduced marketing of our products;and

 

·                                          Changes in corporate ownership, financialcondition, credit worthiness, payment patterns, business direction, salescompensation related to our products, or product mix by the OEMs.

 

Any of these risks could have a material adverseeffect on our business, financial condition, and results of operations. We have experienced, and expect to continue to experience, pricing pressuresand significant variability in orders from our OEM customers, which may in thefuture have a material adverse effect on our quarterly sales and operatingresults.

 

The loss of one or more large OEM customers wouldmaterially harm our business.  While we have contracts with some of ourexisting OEM customers, none of our OEM customers is obligated to purchaseproducts from us except pursuant to binding purchase orders.  Consequently,any OEM customer could cease doing business with us at any time.  Ourdependence upon a few OEMs also results in a significant concentration ofcredit risk, thus a substantial portion of our trade receivables outstandingfrom time to time may be concentrated among a limited number ofcustomers.  In addition, OEM customers have longer payment cycles thatincrease the likelihood of aged or problem accounts receivable.

 

We use multiple warehouses for many of our OEMcustomers to fulfill their hardware orders under a just-in-time inventorymanagement system, which requires us to maintain sufficient inventory levels ofour hardware products at each of these warehouses to satisfy our OEMsanticipated customer demand, and we generally recognize revenue only when theseOEM customers take possession of our hardware products.  We are requiredto plan production, order components, and undertake our manufacturingactivities prior to the time that these orders become firm or the products areaccepted.  In addition, our OEM customers have requested, and are likelyto continue to request from time to time, that we delay shipment dates orcancel orders for hardware products that are subject to firm orders.  As aresult, at any time we may be holding a significant amount of OEM-brandedhardware products in inventory, and our sales to OEMs for future quartersare difficult to predict.  The inability to accurately predict the timingand volume of hardware orders for our OEM customers during any given quartercould adversely affect operating results for that quarter and, potentially, forfuture quarters.  If we underestimate sales, we may not be able to fillorders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If we overestimate sales, we may experienceincreased costs from inventory storage, waste, and obsolescence.

 

**We are dependent upon third-partysuppliers and outsourced manufacturing for our hardware products. Disruption of our access to these supplies and services, or problems with the qualityof supplies or services, could prevent us from filling customer orders and harmour business.**

 

The principal components of our hardware products areelectronic components, power supplies, semiconductors, memory, cableassemblies, line filters, enclosures, and printed circuit boards, all of whichare purchased from outside vendors.  We generally buy components underpurchase orders and generally do not have long-term agreements with oursuppliers.  Also, we generally do not maintain large inventories ofcomponents.  Any termination of, or significant disruption of, ourrelationships with the suppliers of our product components may prevent us fromfilling customer orders in a timely manner which could result in customerdissatisfaction and lost sales.

 

We have occasionally experienced, and we may in thefuture experience, shortages or delays in delivery of components. Although alternate suppliers are available for most of the components andservices needed to produce our products, the number of suppliers of somecomponents is limited, and qualifying a replacement supplier and receivingcomponents from alternate suppliers could take several months.

 

We have limited ability to control quality issues(particularly with respect to faulty components manufactured by third parties),and we depend upon suppliers to deliver components that are free from defects,competitive in functionality and cost, and in compliance with specificationsand delivery schedules.  Disruption in supply, a significant increase inthe cost of one or more components, failure of a third-party supplier to remaincompetitive in functionality or price, or the failure of a supplier to complywith any of our procurement needs could delay or interrupt our ability tomanufacture and deliver our products to customers on a timely 

 

32

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basis, thereby delayingour revenue recognition and adversely affecting our business, financialcondition, and results of operations.

 

We rely on third-party manufacturers for subassemblyof products and for final assembly, quality assurance, and testing of some ofour products.  These outsourcing arrangements and any future outsourcingarrangements involve numerous risks, including the economic and financial viabilityof these manufacturers, reduced control over product quality, deliveryschedules, manufacturing yields, and costs.  Moreover, althougharrangements with such manufacturers may contain provisions for warrantyobligations on the part of such manufacturers, we are primarily responsible toour customers for warranty obligations.

 

**Our hardware products are subject towarranty claims and returns.  Increased warranty claims or returns couldharm our business.**

 

We typically offer a 30-day unconditional money-back guaranteeon our appliance products sold in North America.  We also offer warrantiesfor parts and service on all our hardware products, ranging from one to threeyears (and, in the case of some of our Equinox branded products, fiveyears).  Although our historical return experience has not beensignificant, our returns may increase in the future.  An increase inreturns would have an adverse effect on our sales and could negatively affectour financial results.

 

For our software products, sales are final and we donot generally allow any returns.  Weprovide a 90-day limited warranty on the media used to deliver the software,which is not applicable to electronic downloads, and we generally provide a90-day limited warranty that our products will function in accordance with theuser documentation.

 

In the future, we may, as a result of competitivepressures, requirements in certain geographies, or customer demands, change ourwarranty policies or our warranty terms to provide coverage that is greater inscope and duration than the coverage we currently offer.  If we were toincrease our warranty coverage, our risk of warranty claims, and therefore ourwarranty expense and reserves, would likely increase.

 

**We mustmeet the increased demands on customer service operations or customersatisfaction and sales could suffer.**

 

Continued growth of our sales is likely to beaccompanied by increasing demands on customer service operations.  As aresult of our commitment to a high level of customer service, we will need toinvest significant resources in the maintenance and improvement of our customerservice resources.  Any failure to maintain adequate customer servicecould cause customer dissatisfaction, result in reduced sales of products,reductions in the renewals of software maintenance and support agreements, and,accordingly, materially adversely affect our business, financial condition, andresults of operations.

 

**If we are unable to successfullydevelop our international distribution and reseller networks and internationalsales efforts, results of operations may suffer.**

 

We are working to develop, integrate, and expand ourinternational distribution and reseller networks in an effort to increaseinternational sales of our products.  We may not be successful in developingor expanding the international distribution and reseller network or inmarketing and selling products in foreign markets, particularly Asia.  Ifthe revenue generated by our international sales is not adequate to recover theexpense of establishing, expanding, and maintaining an internationaldistribution and reseller network, our business, financial condition, andresults of operations could be materially adversely affected.  Ifinternational sales become a more significant component of net sales, ourbusiness could become more vulnerable to the risks inherent in doing businesson an international level, including:

 

·                                          Difficulties in managing foreigndistributors and resellers;

 

·                                          Longer payment cycles and problems incollecting accounts receivable;

 

·                                          The effects of seasonal customer demand;

 

·                                          Differing license terms and conditions tomeet local requirements;

 

·                                          Changes in regulatory requirements;

 

·                                          Difficulties in meeting the requirementsof different international product regulations, including import and exportrequirements, tariffs, and other trade barriers;

 

·                                          Risks relating to the protection of ourintellectual property rights;

 

33

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·                                          The impact on our marketing expenses andour research and development resources as we localize our product offerings tomeet local user requirements such as language translations and hardwarecompatibility issues;

 

·                                          Fluctuations in currency exchange rates;and

 

·                                          Potentially adverse tax consequences andpolitical instability.

 

The existence or occurrence of any one or more of these factors couldhave a material adverse effect on our business, financial condition, andresults of operations.

 

**Due to the international nature ofour business, political or economic changes or other factors could harm ourfuture revenue, increase our costs and expenses, and impair our financialcondition.**

 

We are a global company with sales, manufacturing, andresearch and development efforts around the world.  Sales outside the United States generateapproximately half of our revenue, over half of our manufacturing takes placeoutside the United States, and we have research and development centers inseveral locations outside the United States.  Accordingly, our business,operating results, future revenue, gross margin, expenses, and financialcondition could suffer due to a variety of international factors, including:

 

·                                          Ongoing instability or changes in acountry’s or region’s economic or political conditions, including inflation,recession, interest rate fluctuations, and actual or anticipated military orpolitical conflicts, particularly in areas where we have offices or otherfacilities;

 

·                                          Currency fluctuations, which couldcontribute to variations in sales of products and technologies and could alsoaffect our reported results expressed in U.S. dollars;

 

·                                          Longer accounts receivable cycles andfinancial instability among customers;

 

·                                          Tax or trade regulations, tariffs,duties, and procedures and actions affecting production, pricing, and marketingof or payments for products;

 

·                                          Local labor conditions and otherregulations;

 

·                                          Differing technology standards or customerrequirements;

 

·                                          Limited or unfavorable intellectualproperty protection in certain foreign countries including the loss ofproprietary information due to piracy or misappropriation;

 

·                                          Fluctuations in freight costs anddisruptions at important geographic points of exit and entry;

 

·                                          Natural or manmade disasters, such asearthquakes, tsunamis, flooding, hurricanes, typhoons, fires, power shortages,blackouts, telecommunications failures, terrorism, or computer viruses;

 

·                                          Medical epidemics, such as avian flu orSevere Acute Respiratory Syndrome (SARS);

 

·                                          Seasonal reductions in business activityin certain foreign countries, such as the summer months in Europe;

 

·                                          Compliance with a wide variety of complexlaws, treaties, and regulations that increase the risks of doing business incertain foreign countries;

 

·                                          Restrictions against repatriation ofearnings from our international operations;

 

·                                          Difficulties in staffing and managinginternational operations, including the difficulty in managing a geographicallydispersed workforce;

 

·                                          Possible non-compliance with our Code ofConduct or other corporate policies due to inconsistent laws, interpretations,and/or application of corporate standards in foreign countries;

 

·                                          Increased financial accounting andreporting burdens and complexities; and

 

34

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·                                          The need to localize our products.

 

The factors described above also could disrupt ourproduct development and manufacturing, key suppliers, and OEMs and resellerslocated outside of the United States.  For example, we rely onmanufacturers in Asia and Europe for the assembly and manufacture of many ofour hardware products, and we conduct substantial software development andtesting operations in China. Accordingly, we are directly affected by economic, political, andmilitary conditions in China.  Anyinterruption or curtailment of trade between China and its present tradingpartners could materially adversely affect our product development, productreleases, support, business, operating results, and financial condition.

 

Continued or increased international politicalinstability, evidenced by the threat or occurrence of terrorist attacks,enhanced national security measures in the United States, sustained militaryaction or other conflicts, or strained international relations may impair ourability to do business, increase our costs and adversely affect our stockprice.  Increased internationalinstability may negatively impact our ability to obtain adequate insurance atreasonable rates or require us to take extra security precautions for ourdomestic and international operations.

 

**Fluctuations in the value of foreigncurrencies could result in currency exchange losses.**

 

Currently, a majority of our international business isconducted in U.S. dollars.  However, as we expand our internationaloperations, it is likely that international business will increasingly beconducted in foreign currencies.  In particular, the introduction of theeuro has led many of our European customers to request or insist that our salesto them be denominated in euros instead of U.S. dollars and sales from oursoftware operations are frequently conducted in foreign currencies.  Fluctuations in the value of foreigncurrencies relative to the U.S. dollar have caused, and are expected toincreasingly cause, currency transaction gains and losses.  In addition,currency fluctuations could also affect our reported results expressed in U.S.dollars.  While we attempt to hedge ourforeign currency exposure, we cannot predict the effect of exchange ratefluctuations upon future quarterly and annual operating results, and we mayexperience currency losses in the future.

 

**The sales cycle for our softwareproducts is unpredictable, making it difficult to forecast operating resultsfor any given period.**

** **

The sales cycle for our software products is typicallyninety to one hundred eighty days or longer. This sales cycle is subject to a number of significant risks over whichwe have little or no control, including:

 

·                                          Customers’ budgetary constraints,fluctuations, or uncertainty, internal acceptance requirements, and procurementprocedures;

 

·                                          Concerns about the actions orannouncements of our competitors and their products;

 

·                                          Concerns about the future or performanceof our company; and

 

·                                          Changes in economic conditions generallyand in the technology market specifically.

 

Moreover, our software revenue is heavily weightedtoward the end of each quarter, with as much as sixty percent of LANDesk’srevenue recorded in the third month of a quarter, making it difficult toforecast operating results for any quarter or give accurate guidance.  For large opportunities, especially forenterprise-wide sales, the sales cycle is often significantly longer than ouraverage sales cycle.  In addition, theselarge opportunities are more difficult to forecast, and if we do not correctlyforecast the timing in a given period, the amount of revenue we recognize in aperiod could be higher or lower than we expect, which could significantlyaffect our operating results for the then current period and future periodsover which revenue would have been recognized. In addition, the terms and conditions of the legal agreements for theselarge opportunities are often based on our customers’ purchase agreements andmay contain terms that are generally less favorable to us than our standardterms and conditions. As a result, revenue recognition may be delayed orotherwise negatively affected, and if we fail to meet expectations, the price ofour common stock could be negatively affected.

 

**A significant percentage of oursoftware revenue is dependent on sales to existing customers or the renewal ofannual software upgrade protection or maintenance services by existingcustomers.**

** **

Our LANDesk Division has historically derived, andplans to continue to derive, a significant portion of our total softwarerevenue from existing customers who purchase additional products or annualmaintenance or upgrade protection.  Wedepend on our installed base of software customers for future revenue from thepurchase of annual software upgrade protection or maintenance services.  As we introduce new software products, ourcurrent customers may not require or desire the functionality of our new 

 

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products and may choosenot to license these products or renew their agreements for maintenance orupgrade protection.  If our customers donot purchase additional products or increased numbers of products already inuse, or renew annual software upgrade protection or maintenance services, ourability to increase or maintain revenue levels could be limited to only newcustomers.

 

Maintenance revenue related to the licensing of oursoftware products is a significant part of our current and future operatingrevenue.  In general, maintenance feesincrease with the increase in the use of our software.  Accordingly, we receive higher maintenancefees with new license agreements and as existing customers install more of oursoftware products on additional systems. Due to increased discounting for larger sales opportunities, maintenancefees on a per unit basis for such large deals can be lower than average.  In addition, customers are generally providedreduced annual maintenance percentages for entering into long-term maintenanceagreements.  Declines in our licensebookings, increases in long-term maintenance agreements, customers electing tomigrate to competitive products or find alternatives to our products, and/orincreased discounting could lead to reduced software maintenance revenue andreduced gross margins.

 

**Our software products are designedwith interoperability or compatibility with many third-party platforms,systems, and applications, the absence of which may harm our business.**

** **

Our software products are designed for use withspecific third-party platforms, systems, and applications.  We believe the breadth of our integrationwith such platforms, systems and applications is a significant competitiveadvantage.  Any significant change inthese third-party products could result in the loss of interoperability orcompatibility with our products, making our products less attractive,increasing our research and development costs in order to modify our products,license new solutions, or develop new products, and potentially harming ourfuture revenue.  Our failure toanticipate, manage and adapt to these risks could result in significant delaysin our product releases, changes in our product roadmaps, loss of currentcustomers for whom the lost compatibility is an issue, and damage to ouroperating results.

 

**Our software products includelicensed third-party content or code upon which we rely for theinteroperability, integration, development, or updates of our products, anddisruption of our access to such code or content could delay product releases,inhibit our compatibility with third-party products, and harm our business.**

** **

The principal components of our software products areproprietary code and content.  We do,however, rely on some licensed third-party code, content, or other intellectualproperty, and we expect to use such third-party code, content, or intellectualproperty in future products. Although we believe that there are usuallyadequate alternative sources for the third-party technology licensed to us, anysignificant interruption in the availability of these third-party softwareproducts on commercially acceptable terms or any defects in these productscould delay development of future products or enhancement of our futureproducts and harm our revenue.  Use ofsuch third-party code, content, or other intellectual property presents riskssuch as:

 

·                                          Owners or licensees of third-partysystems could adopt more restrictive policies or impose unfavorable or unacceptableterms and conditions for access to their products making it more difficult forus to make our products compatible with their products and resulting in higherresearch and development costs for us for the enhancement or modification ofour existing products and the development of new products;

 

·                                          Functionality provided by third-partycode, content, or other intellectual property in our products may becomeobsolete, defective, or incompatible with future versions of our products, maynot be adequately maintained or updated, and we may be unable to find viablealternatives or develop our own proprietary solution;

 

·                                          Quality, warranty, and support terms varydramatically when licensing third-party code, content, or other intellectualproperty and we have limited ability to control quality issues with third-partycode, content, or other intellectual property and must we depend on our ownresearch and development personnel to evaluate and select third-party code,content, or other intellectual property that we believe is of the most value toour customers; and

 

·                                          Technical difficulties in integrating ourproducts and third-party code, content, or other intellectual property tocreate a combined solution, and the risk that customers will not perceive theneed for such integrated solutions.

 

Any significant termination of a third-party license,change in third-party license provisions, increase in the cost of suchthird-party code, content or other intellectual property, failure of a code,content or other intellectual property provider to remain competitive in functionality,or defect in or a quality issue could delay or interrupt our ability to developand deliver software products to customers on a timely basis.  This could delay our revenue recognition andadversely affect our business, financial condition, and results of operationsand possibly expose us to claims under license agreements with our customersand possibly increased litigation fees and expenses.  Our failure to anticipate, manage, and adaptto these risks could result in significant delays in our products releases,changes in our product roadmaps, and damage to our operating results.

 

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**Softwareerrors or bugs, and possible product liability claims related to such errors orbugs, could result in increased costs, damage to our reputation, and loss ofmarket share.**

** **

Our software products are generally large andintricate programs.  As a result, ourcurrent software products, updates, upgrades, or future products may containerrors, failures, or “bugs,” some of which may not become known until after theproduct has been released by us for use by customers.  While we routinely test our products for sucherrors and identify and correct bugs through our customer support group, theseproblems are inevitable.  Any significanterrors may result in, among other things, loss of, or delay in, the marketacceptance or our products, lost revenue and sales of our products,reallocation of, or increases in, development and customer support resources,impairment to our reputation, loss of future renewal or maintenance revenue,and increased service and warranty costs. Errors could also result in significant delays in the release ofupdates, upgrades, or new products while such errors are corrected.  Moreover, because our products primarilysupport other systems and applications, any software errors or bugs in theseother systems or applications may affect the performance of our software, andit may be difficult or impossible to determine where the errors reside.  As a result, product errors, failures, orbugs could result in significant harm to our business and have a materialadverse effect on our results of operations.

 

We may be subject to legal actions or claims fordamages related to product errors which could, whether or not successful,increase costs and distract our management and our development and supportteams and could harm our business, result in unexpected expenses and damage ourreputation.  Our license agreements withour customers typically contain provisions designed to limit exposure topotential product liability claims, and, to the extent permitted by governinglaw, our standard agreements in many jurisdictions also provide that we willnot be liable for indirect or consequential damages caused by the failure ofour products.  In certain jurisdictions,however, warranty and limitation of liability provisions are not effective.

 

**Use of free or open source softwareor technology in our products or in the development of our products may reduceour ability to control the quality and support for products and may result indamage to our operating results.**

** **

Free or “open source” software is software that ismade widely available by its authors or other third parties and is oftenlicensed on an “as is” basis for a nominal fee or, in some cases, at nocharge.  We have incorporated some freeand open source software into our products, allowing us to enhance certainsolutions without incurring substantial additional research and developmentcosts.  In addition, we may use free oropen source tools in the development of our products.  While we have not experienced any materialproblems as a result of our use of free or open source software, use of free oropen source software entails significant risks including:

 

·                                          Free or open source software ortechnology becoming competitive with our proprietary technology, which couldcause sales of our products to decline or force us to reduce the fees we chargefor our products, which could have a material adverse impact on our revenue andoperating margins;

 

·                                          Requiring that we make available the source code for any modifications orderivative works we make to or from the free or open source software, and thatwe license or contribute such modifications or derivative works under the termsof a particular free or open source license or other license granting thirdparties certain rights of further use;

 

·                                          Our proprietary software could be combined with open sourcesoftware in such a way that we would be required to release the source code ofour proprietary software; and

 

·                                          The lack of anywarranty, maintenance, or support for most open source software or technology.

 

We haveestablished processes to help minimize these risks to the extent within ourcontrol, including a review process for screening requests from our developmentorganizations for the use of free or open source, but we cannot be sure thatall free or open source software, technology, or tools are submitted forapproval prior to use in our products or in the development of our products orthat all use is in compliance with our corporate policies. These risks, if noteliminated, could negatively affect our ability to sale and license ourproducts and could materially impact our business.

 

**Executive officers and other keypersonnel may depart, which could adversely affect our results of operationsand harm our ability to grow the business.**

 

We are greatly dependent on the ability to retain keymanagement, sales, and technical personnel, and our future success is highlydependent upon the personal efforts of our management, sales, and technicalpersonnel and other key employees.  The loss of services of key personnelcould have a material adverse effect on our business, financial condition, andresults of operations.  We have attempted to mitigate these risks byoffering key employees retention bonuses (payable only if they continueemployment with us for 

 

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specified periods) and equity awards, but there is the risk that wecould nevertheless lose key management, sales, and technical employees.

 

We have historically used stock options and arecurrently using restricted stock units, including both time-based,  performance-based and marketconditioned-based shares, as a key component in our executive and employeecompensation programs in order to align employees’ interests with the interestsof our stockholders, encourage employee retention, and provide competitivecompensation packages.  Many of our employee stock options are fullyvested, but most of these outstanding and vested options are currentlyunderwater.  This could affect our ability to retain presentemployees.  In addition, we are now required to record a charge toearnings for employee stock option grants and other equity incentives. Moreover, applicable stock exchange listing standards relating to obtainingstockholder approval of equity compensation plans could make it more difficultor expensive for us to make equity awards to employees in the future.  Asa result, we may incur increased compensation costs, change our equitycompensation strategy, or find it difficult to attract, retain, and motivateemployees, any of which could materially adversely affect our business.

 

As we expand our international operations, we will berequired to recruit and retain experienced management, sales and technicalpersonnel in our international offices, and we expect that the identification,recruitment, training and retention of such personnel will require significantmanagement time and effort and resources. Competition for employees with the skills required, particularlymanagement, engineering and other technical personnel, is intense, and therecan be no assurance that we will be able to attract and retain highly skilled employeesin sufficient numbers to sustain our current business or to support futuregrowth.  We may need to pay recruiting or agency fees and offer additionalcompensation or incentives to attract and retain these and other employees,resulting in an increase to our operating expenses.

 

In addition, for the last several years, we haveacquired several companies and these acquisitions have resulted in increasedresponsibilities and placed significant strain on our managerial, operational,and financial resources and resulted in new and increased responsibilities formanagement personnel.  There can be no assurance that our management,personnel, systems, procedures, and controls are, or will be, adequate tosupport our existing and future operations or that we will continue togrow.  If we fail to recruit and retainsufficient and qualified managerial, operational, or financial personnel or toimplement or maintain internal systems that enable us to effectively manage ourgrowing business and operations worldwide, our financial results in any givenperiod may be adversely affected and our business and financial condition couldbe materially harmed.

 

**Our management changes may disruptour business or affect our profitability.**

** **

In January 2008, John R. Cooper, our Chief ExecutiveOfficer and the Chairman of the Board of Directors, announced his resignation,effective March 31, 2008.  Hisresignation and the transition to a new chief executive officer could createuncertainty and confusion among our employees, customers, andstockholders.  In addition, the process of identifying Mr. Cooper’ssuccessor could distract us and adversely affect or delay customer purchasedecisions or decisions about the strategic direction of our business and raiseconcerns among our employees, customers, and stockholders, all of which couldaffect our sales, profitability, or results of operations.

 

**Difficulties encountered duringchanging economic conditions could adversely affect our results of operations.**

 

Our ability to effectively manage during changingeconomic conditions will require us to continue to implement and improve ouroperational, financial, and information systems and internal controls and willlikely require additional management personnel.  In addition, we believethat we must continue to develop improved engineering, financial, marketing,sales, and customer service capabilities in order to develop new products andtechnologies, secure new customers, and effectively serve the evolving needs ofpresent and future customers.  We may not be successful in strengtheningthese capabilities.  Without adequate management, engineering, financial,product development, marketing, sales, and customer service capabilities, ourability to effectively manage during changing economic conditions, expand andenhance our product lines, further penetrate existing markets, and develop newmarkets will be significantly limited.  If we are unable to effectivelymanage during changing economic conditions, our business, financial condition,and results of operations could be materially adversely affected.

 

Because our business and operating results depend to asignificant extent on the general conditions in the server market, any adversechange in the server market due to adverse economic conditions, decliningcapital spending levels, or other factors could have a material adverse effecton our business, financial condition, and results of operations.  Inaddition, we continue to see industry-wide initiatives by OEMs and bydistributors and resellers of our hardware products to reduce their inventoriesand to shorten their lead times, thereby reducing early commitments to firmorders by our major OEM and our distributor and reseller customers.

 

**Our line of credit couldadversely affect us and our operations.**

** **

In the second quarter of 2006, we obtained a $250million unsecured, five-year, revolving, bank line of credit, and we usedborrowings under this line of credit to fund a portion of the LANDeskacquisition and the purchase of our shares under our recently-

 

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expanded stock repurchaseprogram.  We may increase this line ofcredit or seek other credit lines in the future.  The balance on our line of credit was $140million as of March 28, 2008.  Interestexpense on borrowings and additional future borrowings under the line of creditcould adversely affect our future net income, margins, expenses, and financialconditions by:

 

·                                          Requiring us to dedicate a substantialportion of our cash flow from operations to payments on our indebtedness, whichwould reduce the availability of our cash flow to fund internal growth throughworking capital and capital expenditures and for other general corporatepurposes;

 

·                                          Increasing our vulnerability to economic downturns inour industry;

 

·                                          Increasing our vulnerability to interestrate increases to the extent any of our variable rate debt is not hedged;

 

·                                          Placing us at a competitive disadvantagecompared to our competitors that have less debt in relation to cash flow;

 

·                                          Limiting our flexibility in planning foror reacting to changes in our business and our industry;

 

·                                          Limiting, among other things, our abilityto borrow additional funds, refinance the line of credit, or obtain otherfinancing capacity; and

 

·                                          Subjecting us to a risk of noncompliancewith financial and other restrictive covenants in our indebtedness.

 

**The line of credit contains affirmative andnegative covenants, including limitations on our ability to (i) makedistributions, investments, and other payments unless we satisfy certainfinancial tests or other criteria, (ii) incur additional indebtedness, and(iii) make acquisitions and capital expenditures.  All of these restrictions could affect ourability to operate our business and may limit our ability to take advantage ofpotential business opportunities as they arise. The failure to comply with these covenants could result in an event ofdefault which, if not cured or waived, could have a material adverse effect onus.**

** **

Our ability to comply with these provisions of ourline of credit may be affected by changes in the economic or businessconditions or other events beyond our control. If we do not comply with these covenants and restrictions, we could bein default under our line of credit, and our debt, together with accruedinterest, could then be declared immediately due and payable.  There can be no assurance that we will beable to obtain sufficient funds to enable us to repay or refinance our debtobligations on commercially reasonable terms or at all.  We also face interest rate risk on our bankline of credit which currently bears interest at a variable rate of LIBOR plus70 basis points.  We have partiallyhedged this exposure to interest rate risk with an interest rate swap, whichhas a remaining notional amount of $60 million, through a well establishedfinancial institution.

 

**Unanticipated changes in our taxrates or exposure to additional income tax liabilities could affect ourprofitability.**

 

We are subject to income taxes in both the UnitedStates and various foreign jurisdictions, and our domestic and internationaltax liabilities are subject to the allocation of expenses in differentjurisdictions.  Our effective tax rates could be adversely affected bychanges in the mix of earnings in countries with differing statutory tax rates,in the valuation of deferred tax assets and liabilities, in tax laws andtreaties, or by material audit assessments, which could affect ourprofitability.  In addition, the amount of income taxes we pay is subjectto audit in various jurisdictions, and a material assessment by a governing taxauthority could affect our profitability.

 

**Failure to maintain adequate internalsystems and effective internal controls over our financial reporting andinformation systems could result in our management and auditors being unable tocertify the effectiveness of our internal controls over financial reporting andinformation systems, which could harm our business reputation and cause ourstock price to decline.**

** **

Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat we implement and maintain adequate internal systems and effective internalcontrols over financial reporting and information systems.  The absence of such controls could have amaterial adverse effect on our business, financial condition, and results ofoperations.  In addition, correction ofany “significant deficiencies” or “material weaknesses” (as defined under PCAOBguidelines) could require additional remedial measures including hiringadditional personnel, which could be costly and time-consuming.  If a significant deficiency or materialweakness exists at any year-end (including a material weakness identified priorto year-end for which there is an insufficient period of time to evaluate andconfirm the effectiveness of the corrections or related new procedures), ourmanagement and our auditors will be unable to report favorably as to theeffectiveness of our control over financial reporting or informationsystems.  This could result in a loss ofinvestor confidence in the accuracy and completeness of our financial reportsand our management, which could result in a decline of our stock price, damageto our business reputation, and potential litigation.

 

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**Changesin accounting standards or the interpretation of accounting standards,especially changes related to revenue recognition, could cause significantimpact on our revenue or earnings.**

** **

Based on our interpretation of current accountingstandards, we believe we have properly reported our current sales and licenserevenue.  New accounting standards orregulations, changes to current accounting standards, or differentinterpretations of existing accounting standards in the future could result incorresponding changes in our revenue recognition or other accounting policiesthat could have a material adverse effect on our financial condition andoperating results.

 

**Unforeseen environmental costs couldnegatively affect our future earnings.**

 

Some of our operations use substances regulated undervarious federal, state, and international laws governing the environment,including those governing the discharge of pollutants into the air and water,the management and disposal of hazardous substances and wastes, and the cleanupof contaminated sites.  Many of our products are subject to variousfederal, state, and international laws governing chemical substances inproducts, including those regulating the manufacture and distribution ofchemical substances and those restricting the presence of certain substances inelectronics products.  We could incur substantial costs, including cleanupcosts, fines, civil or criminal sanctions, third-party property damage, orpersonal injury claims if we were to violate or become liable underenvironmental laws or if our products become non-compliant with environmentallaws.  We also face increasing complexity in our product design andprocurement operations as we adjust to new and future requirements relating tothe materials composition of our products, including the restrictions on leadand certain other substances that will apply to specified electronics productsput on the market in the European Union as of July 1, 2006 (Restriction ofHazardous Substances Directive) and similar legislation in China and othercountries.  The ultimate costs under environmental laws and the timing ofthese costs are difficult to predict, and liability under some environmentallaws relating to contaminated sites can be imposed retroactively and on a jointand several basis.

 

We could also face significant costs and liabilitiesin connection with product take-back legislation.  The European Union hasfinalized the Waste Electrical and Electronic Equipment Directive (WEEE), whichmakes producers of electrical goods, including computers and peripherals,financially responsible for specified collection, recycling, treatment, anddisposal of past and future covered products.  This deadline to enact andimplement the directive by individual European Union governments generally wasAugust 13, 2004, although extensions were granted to some countries (suchlegislation, together with the directive, the “WEEE Legislation”), andproducers are financially responsible under the WEEE Legislation beginning inAugust 2005.  Similar legislation has been or may be enacted in othergeographies, including in the United States and Japan, the cumulative impact ofwhich could be significant for us.  We have incurred some costs and willcontinue to incur costs under the WEEE legislation but the amount and timing ofthese costs are difficult to predict.

 

**Provisions in our charter documentsand in Delaware law may discourage potential acquisition bids for us and mayprevent changes in management that stockholders may favor.**

 

Provisions in our charter documents could discouragepotential acquisition proposals and could delay or prevent a change in controltransaction that stockholders may favor.  These provisions could have theeffect of discouraging others from making tender offers for shares, and as aresult, these provisions may prevent the market price of our common stock fromreflecting the effects of actual or rumored takeover attempts and may preventstockholders from reselling their shares at or above the price at which they purchasedtheir shares.  These provisions may also prevent changes in managementthat stockholders may favor.  Our charter documents do not permitstockholders to act by written consent, limit the ability of stockholders tocall a stockholders meeting, and provide for a classified Board of Directors,which means stockholders can only elect, or remove, a limited number ofdirectors in any given year.  Furthermore, the Board of Directors has theauthority to issue up to five million shares of preferred stock in one or moreseries.  The Board of Directors can fix the price, rights, preferences,privileges, and restrictions of such preferred stock without any further voteor action by our stockholders.  The issuance of shares of preferred stockmay delay or prevent a change in control transaction without further action byour stockholders.

 

In addition, Delaware law may inhibit potentialacquisition bids for us.  Delaware law prevents certain Delawarecorporations, including Avocent, from engaging, under certain circumstances, ina business combination with any interested stockholder for three yearsfollowing the date that such stockholder became an interested stockholder.

 

**Our stock price may be volatile.**

** **

Our stock has experienced significant volatility inprice, in particular whenever there has been a difference between our actualfinancial results and the published expectations of analysts.  We have also experienced changes in our stockprice as a result of speculation in the press or investment community about ourstrategic position, financial position, results of operations, business, orsignificant transactions or acquisitions. The stock market in general has experienced price and volumefluctuations that have 

 

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negatively affected themarket price of many publicly-held companies in ways seemingly unrelated to theactual operating performance of these companies. These factors, as well asgeneral economic and political conditions and the announcement of proposed andcompleted acquisitions or other significant transactions, or any difficultiesassociated with such transactions, by us or our current or potentialcompetitors, may materially adversely affect the market price of our commonstock in the future. Additionally, volatility, lack of positive performance inour stock price or changes to our overall compensation program including ourstock incentive program may adversely affect our ability to retain keyemployees, virtually all of whom are compensated, in part, based on theperformance of our stock price.

 

**Item2.****       ****Unregistered Sales ofEquity Securities and Use of Proceeds.**

** **

In 2004 our Board of Directors approved a stockrepurchase program whereby we may purchase shares of our common stock.  Our Board has approved a total of 19 millionshares to be repurchased under this program, including 4 million additionalshares approved by our Board in January 2008. The plan has no expiration date.  Detailsof purchases made during the quarter ended March 28, 2008 are as follows:

 
| **Period:**                                | ** ** | **Total Number of   Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period   Presented** | ** ** | **Total Cumulative  Number of   Shares Purchased as   Part of Publicly   Announced Plan** | ** ** | **Maximum  Number of   Shares  Remaining to  Purchase Under  the   Plan** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
|                                       |       |                                                                                    |       |                                                                                   |       |                                                                                                                                        |       |                                                                                               |       |
| January 1, 2008  — January 25, 2008   |       | 1,587,575                                                                               |       | $                                                                                      | 15.59      |                                                                                                                                        | 14,287,575 |                                                                                               | 4,712,425  |   |
| January 26, 2008  — February 22, 2008 |       | 1,462,425                                                                               |       | $                                                                                      | 16.56      |                                                                                                                                        | 15,750,000 |                                                                                               | 3,250,000  |   |
| February 23,  2008 — March 28, 2008   |       | 862,300                                                                                 |       | $                                                                                      | 16.22      |                                                                                                                                        | 16,612,300 |                                                                                               | 2,387,700  |   |
| Quarter ended  March 28, 2008              |       | 3,912,300                                                                               |       | $                                                                                      | 16.09      |                                                                                                                                        |       |                                                                                               |       |   |

 

Approximately 159,000 shares were withheld as payment for employeepayroll withholding taxes at the release of vested restricted stock units inthe first quarter of 2008 (*see Note 3 to ourcondensed consolidated financial statements contained in Part I, Item 1 of thisquarterly report*).  The159,000 shares were considered to be treasury shares; however, these treasuryshares were immediately retired and are not considered in the table above.

 

During the period from March 26, 2008 through March 28,2008, we purchased 88,000 additional shares of our common stock under our sharerepurchase program for a total cost of $1.5 million.  However, as these transactions settled afterMarch 28, 2008, we will record these trades as occurring in the second quarterof 2008.

 

**Item6.****       ****Exhibits.**

 

(a) Exhibits

 

**31.1**                           Sarbanes-Oxley Act of 2002 Section 302(a) Certification of the ChiefExecutive Officer

** **

**31.2**                           Sarbanes-Oxley Act of 2002 Section 302(a) Certification of the Chief FinancialOfficer

** **

32.1                           Certificationof the Chief Executive Officer and the Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

ITEMS 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

 

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### **SIGNATURE**

### ** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |        | AVOCENT CORPORATION                                             |
|--------|-------------|-----------------------------------------------------------------|
|   |        | (Registrant)                                                    |
|   |        |                                                            |
|   |        |                                                            |
| Date:  | May 6, 2008 | /s/ Edward H.  Blankenship                                      |
|   |        | Edward H. Blankenship                                           |
|   |        | Senior Vice President of Finance, Chief Financial               |
|   |        | Officer, and Assistant Secretary (Principal  Financial Officer) |

 

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